Medicaid Program; Medicaid Managed Care State Directed Payments and Medicaid Fee-for-Service Targeted Medicaid Practitioner Payments

Federal RegisterMay 22, 2026

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 438 and 447

[CMS-2449-P]

RIN 0938-AV69

Medicaid Program; Medicaid Managed Care State Directed Payments and Medicaid Fee-for-Service Targeted Medicaid Practitioner Payments

AGENCY:

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services (HHS).

ACTION:

Proposed rule.

SUMMARY:

This proposed rule describes alternatives to modify the limit on the total payment rate and other requirements for State directed payments in Medicaid managed care. We propose these changes based on our authority to interpret and implement section 1902(a)(4) of the Social Security Act (the Act) with respect to prepaid inpatient health plans and prepaid ambulatory health plans, and section 1903(m)(2)(A)(iii) of the Act, which require that contracts between States and managed care organizations to provide payments under a risk-based contract for services and associated administrative costs that are actuarially sound. This rule also proposes to set a limit for certain targeted Medicaid payments in Medicaid fee-for-service. We propose this change based on our authority to interpret and implement section 1902(a)(30)(A) of the Act with respect to certain targeted Medicaid payments which require that payments be consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, by July 21, 2026.

ADDRESSES:

In commenting, please refer to file code CMS-2449-P.

Comments, including mass comment submissions, must be submitted in one of the following three ways (please choose only one of the ways listed):

Electronically.

You may submit electronic comments on this regulation to

https://www.regulations.gov/docket/CMS-2026-1916.

Follow the “Submit a comment” instructions.

By regular mail.

You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2449-P, P.O. Box 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

By express or overnight mail.

You may send written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2449-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

John Giles, (410) 786-5545, Medicaid Managed Care. Jocelyn Velez, (410) 786-2367, Medicaid Fee-for-Service Payments.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following website as soon as possible after they have been received:

https://www.regulations.gov.

Follow the search instructions on that website to view public comments. CMS will not post on

Regulations.gov

public comments that make threats to individuals or institutions or suggest that the commenter will take actions to harm an individual. CMS continues to encourage individuals not to submit duplicative comments. We will post acceptable comments from multiple unique commenters even if the content is identical or nearly identical to other comments.

Plain Language Summary:

In accordance with 5 U.S.C. 553(b)(4), a plain language summary of this proposed rule may be found at

https://www.regulations.gov/.

I. Background

Title XIX of the Social Security Act (the Act) established the Medicaid program as a Federal-State partnership for the purpose of providing and financing medical assistance to specified groups of eligible individuals. States

have considerable flexibility in designing their programs but must abide by requirements specified in the Federal Medicaid statute and regulations. Each State is responsible for administering its Medicaid program in accordance with an approved State plan, which specifies the scope of covered services, groups of eligible individuals, payment methodologies, and all other information necessary to assure the State plan describes a comprehensive and sound structure for operating the Medicaid program, and ultimately, provides a clear basis for claiming Federal matching funds.

The use of the term “State” refers to all 50 states, the District of Columbia and the territories unless otherwise noted.

As of November 2025, the Medicaid program provided essential health care coverage to more than 76 million

individuals. In 2024, Medicaid had annual outlays of more than $931.7 billion (total computable).

The program covers a broad array of health benefits and services critical to many populations. For example, Medicaid pays for approximately 41 percent of all births in the United States,

is the largest payer of long-term services and supports,

and provides health coverage for more than half of all children in the United States.

November 2025 Medicaid and CHIP Enrollment Snapshot. Accessed at

https://www.medicaid.gov/resources-for-states/downloads/eligib-oper-and-enrol-snap-nov2025.pdf.

CMS National Health Expenditure Fact Sheet. Accessed at

https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet.

National Center for Health Statistics. Key Birth Statistics (2024 Data.). Accessed at

https://www.cdc.gov/nchs/nvss/births.htm.

Colello, Kirsten J.

Who Pays for Long-Term Services and Supports?

Congressional Research Service. Updated June 15, 2022. Accessed at

https://crsreports.congress.gov/product/pdf/IF/IF10343.

Desilver, D. What the data says about Medicaid. June 2025. Pew Research Center. Accessed at

https://www.pewresearch.org/short-reads/2025/06/24/what-the-data-says-about-medicaid/#:~:text=blind%20or%20disabled.-,How%20many%20people%20have%20Medicaid%20coverage?,adult%20population%20as%20of%20January.

Depending on the State and its Medicaid program structure, beneficiaries access their health care services using fee-for-service (FFS) and/or managed care delivery systems. States also provide services through demonstrations and waiver programs under both delivery systems. In 2024, approximately 85 percent of Medicaid beneficiaries were enrolled in managed care;

the remaining individuals

received all or some services through FFS.

https://data.medicaid.gov/dataset/79692ea5-21e1-56bf-8149-97d437120c4b?conditionsproperty=year&conditionsvalue=2024&conditionsoperator=%3D.

On June 6, 2025, President Trump signed a Presidential Memorandum titled “Eliminating Waste, Fraud, and Abuse in Medicaid”

(hereinafter referred to as “the Presidential Memorandum”). This memorandum directed the Secretary of Health and Human Services (the Secretary) to eliminate fraud, waste, and abuse in Medicaid, including by ensuring Medicaid payment rates are not higher than Medicare, to the extent permitted by applicable law. The memorandum noted the Administration's concerns that certain State financing arrangements have, at times, been used to further waste, fraud, and abuse in Medicaid. It also noted that State directed payment (SDPs) have grown substantially in recent years, and that this trajectory threatens the Federal Treasury and Medicaid's long-term stability. It also pointed to distortions created by the incentives in arrangements in which provider taxes or intergovernmental transfers (IGTs) are returned to the same providers through Medicaid payments, thereby absolving States of their obligation to share in the burden of financing the joint Federal and State Medicaid program. When States are relieved of these financial obligations through such arrangements, the memorandum stated that States' incentives for prudent administration are reduced. The memorandum noted that both seniors on Medicare and Medicaid recipients deserve access to quality care in a system free from fraud, waste, and abuse. We are concerned that increased Medicaid payments that are not aligned with statutory objectives such as supporting access to care may instead reward providers primarily on the basis of their ability to supply the non-Federal share of their own payments, rather than on advancing access to or quality of care for Medicaid beneficiaries.

https://www.whitehouse.gov/presidential-actions/2025/06/eliminating-waste-fraud-and-abuse-in-medicaid/.

On July 4, 2025, Public Law (Pub. L.) 119-21 was enacted (which CMS refers to as the “Working Families Tax Cut” (WFTC) legislation). Section 71116(a) of the WFTC legislation directed the Secretary to revise § 438.6(c)(2)(iii) to limit the total payment rate for certain SDPs for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center (AMC) (hereinafter referred to as the “four services”) effective with the first rating period beginning on or after the date of enactment, July 4, 2025. Section 71116(b) of the WFTC legislation provides for the temporary grandfathering period for certain SDPs and requires a phase down beginning with the first rating period that starts on or after January 1, 2028.

To implement section 71116 of the WFTC legislation, the Secretary instructed us to develop and release this proposed rule. To aid State planning efforts until a final rule is issued, we issued a Dear Colleague Letter on February 2, 2026 with preliminary guidance on how we were interpreting certain provision in section 71116 of the WFTC legislation.

9 10

We noted that the information was preliminary in nature and final policies would depend on the contents of the final rule. This letter also signaled that we were considering proposing changes to the limit for the total payment rate for SDPs for other services beyond the four services specified by section 71116 of the WFTC legislation as part of our broader effort to align this rulemaking with the Presidential Memorandum referenced in the letter.

https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-letter-02022026.pdf.

CMS initially issued a Dear Colleague Letter on September 9, 2025; however, this letter was rescinded and replaced on February 2, 2026.

SDPs have become a significant part of the Medicaid program. When designed and implemented with fiscal integrity, they can help States implement provider payment initiatives and delivery system reform efforts that further advance access to care and enhance quality of care in Medicaid managed care. However, as we have seen over time, they can also become vehicles for waste and abuse in the Medicaid program. For example, when these SDPs are not designed to improve care for beneficiaries and are instead designed to financially advantage a small number of providers and disincentivize States from investing in their own Medicaid programs by primarily relying on provider taxes or IGTs to fund the non-Federal share, these arrangements may contribute to inefficient or wasteful Medicaid spending. Through the issuance of the February 2, 2026 Dear Colleague Letter providing preliminary guidance on section 71116 of the WFTC legislation, and publication of the Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole Final Rule (91 FR 4794), we have taken steps to address fiscal integrity concerns in Medicaid. Reforming SDP requirements would allow CMS and States to refocus on the original purpose of these arrangements, which is to permit States to direct certain managed care plan expenditures

within specified parameters to improve access and ultimately, quality of beneficiary care. We strongly believe that Medicaid beneficiaries deserve access to quality care in a system free from fraud, waste, and abuse and that promotes strong fiscal and program integrity.

Throughout this document, the use of the term “managed care plan” includes MCOs, PIHPs, and PAHPs, and is only used when a reference applies to all three arrangements. An explicit reference is used if the provision applies to primary care case management (PCCM) or PCCM entities.

A. Medicaid Managed Care Delivery Systems

The volume of Medicaid beneficiaries enrolled in Medicaid managed care has grown from 81 percent in 2016 to 85 percent in 2022.

States may implement a Medicaid managed care delivery system using four Federal authorities—sections 1915(a), 1915(b), 1932(a), and 1115(a) of the Act; each is briefly described later in this section.

CMCS Managed Care Enrollment Report. Accessed at

https://www.medicaid.gov/medicaid/managed-care/enrollment-report.

Under section 1915(a) of the Act, States can implement a voluntary managed care program by executing a contract with organizations that the State has procured using a competitive procurement process; we review and approve these contracts in accordance with § 438.3(a). To require beneficiaries to enroll in a managed care program to receive services, a State must obtain approval from us under two primary authorities:

• Through a State plan amendment (SPA) that meets standards set forth in section 1932(a) of the Act, States can implement a mandatory managed care delivery system. This authority does not allow States to require beneficiaries who are dually eligible for Medicare and Medicaid (dually eligible beneficiaries), American Indians/Alaska Natives (except as permitted in section 1932 (a)(2)(C) of the Act), or children with special health care needs to enroll in an applicable managed care program. State plans, once approved by us, remain in effect until modified by the State, with our approval.

• Through a waiver under section 1915(b) of the Act, States are permitted to require all Medicaid beneficiaries to enroll in a managed care delivery system, including dually eligible beneficiaries, American Indians/Alaska Natives, or children with special health care needs. After our approval, a State

may operate a section 1915(b) waiver for a 2-year period before requesting renewal for an additional 2-year period. Section 1915(b) of the Act waivers may be approved for a 5-year initial period and renewed for additional 5-year periods if they include individuals who are dually eligible for Medicare and Medicaid.

• We may also authorize managed care programs as part of demonstration projects under section 1115(a) of the Act that include waivers permitting a State to require all Medicaid beneficiaries to enroll in a managed care delivery system, including dually eligible beneficiaries, American Indians/Alaska Natives, and children with special health care needs. Under this authority, States may seek additional flexibility to demonstrate and evaluate innovative policy approaches for delivering Medicaid benefits, as well as the option to provide services not typically covered by Medicaid. Such demonstrations are approvable only if it is determined that the demonstration would promote the objectives of the Medicaid statute and the demonstration is subject to an independent evaluation.

With the exception of section 1915(a) of the Act, the authorities discussed previously all permit States to operate their Medicaid managed care programs without complying with the following standards of the Medicaid statute outlined in section 1902 of the Act:

•

Statewideness

(section 1902(a)(1) of the Act): States may implement a managed care delivery system in specific areas of the State (generally counties/parishes) rather than the whole State.

•

Comparability of Services

(section 1902(a)(10)(B) of the Act): States may provide different benefits to people enrolled in a managed care delivery system.

•

Freedom of Choice

(section 1902(a)(23)(A) of the Act): States may generally require individuals to receive their Medicaid services only from a managed care plan's network of providers or primary care provider, including through PCCMs and PCCM entities.

B. Relevant Medicaid Managed Care Rules

In the May 6, 2016

Federal Register

(81 FR 27498), we published the “Medicaid and Children's Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, and Revisions Related to Third Party Liability” final rule (hereinafter referred to as “the 2016 final rule”) that modernized the Medicaid and CHIP managed care regulations to reflect changes in the use of managed care delivery systems. The 2016 final rule aligned many of the rules governing Medicaid and CHIP managed care with those of other major sources of coverage; implemented applicable statutory provisions; strengthened actuarial soundness payment provisions to promote the accountability of managed care program rates; strengthened efforts to reform delivery systems that serve Medicaid and CHIP beneficiaries; and enhanced policies related to program integrity. The 2016 final rule applied many of the Medicaid managed care rules to separate CHIP programs, particularly in the areas of access, finance, and quality through cross-references at subpart L of 42 CFR part 457 to 42 CFR part 438. States may administer CHIP programs that are separate CHIP programs or as programs that are operated as an expansion of the State's Medicaid program.

In the November 13, 2020

Federal Register

(85 FR 72754), we published the “Medicaid Program; Medicaid and Children's Health Insurance Program (CHIP) Managed Care” final rule (hereinafter referred to as the “2020 final rule”) which streamlined the Medicaid and CHIP managed care regulatory framework to relieve regulatory burdens; support State flexibility and local leadership; and promote transparency, flexibility, and innovation in the delivery of care. The rule was intended to ensure that the regulatory framework was efficient and feasible for States to implement in a cost-effective manner and ensure that States can implement and operate Medicaid and CHIP managed care programs without undue administrative burdens.

In the May 10, 2024

Federal Register

(89 FR 41002), we published the “Medicaid Program; Medicaid and Children's Health Insurance Program (CHIP) Managed Care Access, Finance, and Quality” final rule (hereafter referred to as the “2024 final rule”) which established new standards to help States improve their monitoring of access to care and codified requirements for State use of in lieu of services and settings. The final rule also enhanced quality, fiscal and program integrity requirements for SDPs, addressed impermissible redistribution arrangements related to SDPs, and added clarity to the requirements related to medical loss ratio calculations. The 2024 final rule also codified a limit to the total payment rate (often referred to as the “total payment rate limit”) for certain types of SDPs at the average commercial rate (ACR).

We note that SDPs authorized under § 438.6(c) do not apply to separate CHIP programs. SDPs can, however, be used in Medicaid programs that include Title XXI-funded Medicaid expansion CHIP beneficiaries; that is, programs in which a State receives Federal funding to expand Medicaid eligibility to optional targeted low-income children that meets the requirements of section 2103 of the Act. For purposes of this document, references to “Medicaid” mean = States' programs operated under Title XIX, including those that cover Medicaid expansion CHIP populations, and do not include separate CHIP programs.

C. History of State Directed Payments

Section 1903(m)(2)(A)(iii) of the Act requires that contracts between States and managed care organizations (MCOs) provide for payments under a risk-based contract for services and associated administrative costs to be actuarially sound. Under section 1902(a)(4) of the Act, we also have authority to establish methods of administration for Medicaid that are necessary for the proper and efficient operation of the State plan. Under this authority in section 1902(a)(4) of the Act, we extended the requirement for actuarially sound capitation rates to prepaid inpatient health plans (PIHPs) and prepaid ambulatory health plans (PAHPs). The regulations addressing actuarially sound capitation rates are set forth in § 438.4 through 438.7, and require that such rates be projected to provide for all reasonable, appropriate, and attainable costs required under the terms of the contract and for the operation of the managed care plan during the specified time period and for the population covered under the terms of the contract.

In risk-based managed care programs, managed care plans have the responsibility to manage the financial risk of the contract, and one of the primary tools plans use is negotiating payment rates with providers. Unless there are specific Federal statutory or regulatory requirements or State contractual restrictions, the provider payment rates and conditions for payment between risk-bearing managed care plans and their network providers are subject to negotiation between the parties and may reflect overall private market conditions, as documented in a

network agreement. As long as managed care plans are meeting the requirements for ensuring access to care and network adequacy, States typically provide managed care plans latitude to develop a network of providers to ensure appropriate access to covered services under the contract for their enrollees and fulfill all of their contractual obligations while managing financial risk.

Subject to certain exceptions, States are generally not permitted to direct the expenditures of a Medicaid managed care plan under the contract between the State and the plan, or to make payments to providers for services covered under the contract between the State and the plan (§§ 438.6 and 438.60, respectively). However, there are circumstances in which a State may believe that requiring managed care plans to make specified payments to health care providers is an important tool in furthering the State's overall Medicaid program goals and objectives. For example, a State may direct managed care plan expenditures to ensure that certain minimum payments are made to safety net providers to ensure access to care, to enhance provider payment as mandated by State legislative directives, or to make quality payments to ensure providers are appropriately rewarded for meeting certain program goals. Because this type of State direction reduces the plan's ability to effectively manage costs, in the 2016 final rule, we established specific exceptions to the general rule prohibiting States from directing the expenditures of managed care plans under § 438.6(c)(1)(i) through (iii). These exceptions came to be known as SDPs.

The current regulations under § 438.6(c) specify the parameters for how and when States may direct the expenditures of their Medicaid managed care plans and the associated requirements and prohibitions on such arrangements. Permissible SDPs include directives that plans pay certain providers who participate in value-based purchasing (VBP) models, in multi-payer or Medicaid-specific delivery system reform or performance improvement initiatives, or that managed care plans adhere to certain fee schedule requirements for provider payment (for example, minimum fee schedules, maximum fee schedules, and uniform dollar or percentage increases). Among other requirements, § 438.6(c) requires SDPs to be based on the utilization and delivery of services under the managed care contract and expected to advance at least one of the goals and objectives in the State's managed care quality strategy.

All SDPs must be included in all applicable managed care contract(s) and described in all applicable rate certification(s) as noted under §§ 438.6(c) and 438.7(b)(6), respectively. Further, § 438.6(c)(2)(i) requires that most SDPs be approved in writing by us prior to implementation.

To obtain our written prior approval, States must submit a “preprint”

to us to document how the SDP complies with the Federal requirements outlined under § 438.6(c). States must obtain written approval of certain SDPs for us to approve the corresponding Medicaid managed care contract(s) and rate certifications(s).

SDPs that use minimum fee schedules for providers that provide a particular service under the contract using State plan approved rates as defined in § 438.6(a), or using a total published Medicare payment rate that was in effect no more than 3 years prior to the start of the rating period are not subject to the written prior approval requirement in § 438.6(c)(2)(i); however, they must comply with the requirements currently in § 438.6(c)(2)(ii)(A) through (J) (other than the requirement for written prior approval) and be appropriately documented in the managed care contract(s) and rate certification(s).

The current version of the preprint is available online:

https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf.

Each SDP preprint submitted to us is reviewed by a Federal review team to ensure the payments comply with the regulatory requirements under § 438.6(c) and other applicable laws. The Federal review team may consist of subject matter experts from various components and groups within CMS, which may include those representing managed care policy and operations, quality, and/or actuarial science. Over time, these reviews have expanded to include subject matter experts on financing of the non-Federal share and demonstration authorities, when needed. The CMS Federal review team works diligently to ensure a timely review and that standard operating procedures are followed for a consistent and thorough review of each preprint. Most preprints are submitted for renewal on an annual basis; SDPs that are for VBP arrangements, delivery system reform, or performance improvement initiatives and that meet additional criteria in § 438.6(c)(3)(i) are eligible for multi-year approval. States also have the option to submit preprint amendments when it is necessary to modify the payment arrangement. We endeavor to complete the review of each SDP preprint submission within 90 days; however, there is no regulatory requirement that we approve or disapprove SDPs within a certain time period.

We issued guidance to States regarding SDPs on multiple occasions. In November 2017, we published the initial preprint along with guidance for States on the use of SDPs.

In May 2020, we published guidance on managed care flexibilities to respond to the COVID-19 public health emergency (PHE), including how States could use SDPs in support of their COVID-19 response efforts.

In January 2021, we published additional guidance for States to clarify existing policy, and also issued a revised preprint that States must use for rating periods beginning on or after July 1, 2021.

The revised preprint

is more comprehensive compared to the initial preprint, and it is designed to systematically collect the information that we identified as necessary as part of our review of SDPs to ensure compliance with the Federal regulatory requirements.

This includes identification of the estimated total dollar amount for the SDP, an analysis of total provider payment rates for the class(es) of providers that the SDP is targeting, and information about the sources of the non-Federal share used to finance the SDP. In September 2025, we issued initial guidance regarding section 71116 of the WFTC legislation

and in the letter, acknowledged that the guidance therein was preliminary in nature and final policies would be implemented through a process of notice-and-comment rulemaking. We also published additional guidance on SDP quality evaluations

in September, which detailed regulatory

requirements and recommended best practices for state design and submission of SDP quality evaluation plans and findings.

https://www.medicaid.gov/sites/default/files/federal-policy-guidance/downloads/cib11022017.pdf.

https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051420.pdf.

https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf.

CMS ID No: 10398, OMB No: 0938-1148, #52.

https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf.

https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-ltr-09092025.pdf.

https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/cib09102025.pdf.

The number of preprints includes initial preprint submissions, renewals and amendments.

Since § 438.6(c) was finalized in the 2016 final rule, States have requested approval for an increasing number of SDPs. The scope, size, and complexity of the SDP arrangements submitted by States for approval has also grown steadily and quickly as illustrated by Table 1.

EP22MY26.000

SDPs also represent a notable amount of State and Federal spending. Based on an analysis of all SDP preprints by our Office of the Actuary (OACT), we estimate that absent any changes to existing regulations and before accounting for the impact of the WFTC legislation, SDP spending is projected to be $97.8 billion in fiscal year (FY) 2024 (total computable) and projected to increase to approximately $124.3 billion (total computable) for FY 2025 and $144.6 billion for FY 2026. As total dollars flowing through SDPs have increased significantly even since publication of the 2024 final rule, we have grown increasingly concerned that additional fiscal guardrails are warranted. The proposed changes in this proposed rule are intended to ensure responsible fiscal stewardship of the Medicaid program, as required by section 71116 of the WFTC legislation and consistent with the Presidential Memo.

D. Historical SDP Payment Rate Limits

In the 2016 final rule, § 438.6(c)(2) specified that SDPs must be developed in accordance with § 438.4, and related actuarial standards specified in §§ 438.5, 438.7, and 438.8. Under the definition in § 438.4, actuarially sound capitation rates are “projected to provide for all reasonable, appropriate, and attainable costs that are required under the terms of the contract and for the operation of the MCO, PIHP, or PAHP for the time period and the population covered under the terms of the contract . . .” Consistent with this definition in § 438.4, we noted in the State Medicaid Director Letter (SMDL) #21-001 published on January 8, 2021 that we require States to demonstrate that SDPs result in provider payment rates that are reasonable, appropriate, and attainable as part of the preprint review process.

https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf.

In applying these standards during early SDP reviews, we encountered situations where the absence of a clear quantitative limit on the total payment rate, such as a requirement that rates be no greater than Medicare rates or no greater than the ACR created uncertainty during the CMS review process. In late 2017, we received an SDP preprint to raise inpatient hospital payment rates such that the total payment rate exceeded 100 percent of the comparable Medicare rates, but the payments would remain below the ACR for that service and provider class in that State. We had concerns about whether the payment rates were still reasonable, appropriate, and attainable for purposes of our approval of the SDP as being consistent with the regulatory requirement at the time that all SDPs must be developed in accordance with § 438.4 and the standards specified in § 438.5. At the time, we realized that approving an SDP that exceeded 100 percent of Medicare payment rates would be precedent setting for CMS.

As we noted in the 2024 final rule, Medicare is a significant payer in the health insurance market, and Medicare reimbursement is a standardized benchmark used in the industry. Medicare reimbursement is also a benchmark used in Medicaid FFS, including the Upper Payment Limits (UPLs) that apply to classes of institutional providers, such as inpatient and outpatient hospitals, nursing facilities, and intermediate care facilities for individuals with intellectual disabilities (ICFs/IID), that are based on a reasonable estimate of the amount that Medicare would pay for Medicaid services. The UPLs apply an aggregate payment ceiling based on an estimate of how much Medicare would have paid in total for the Medicaid services as a mechanism for determining economy and efficiency of payment for State plan services while allowing for facility-specific payments.

Generally, for inpatient and outpatient services, these FFS UPL requirements apply to three classes of facilities based on ownership status: (1) State government-owned or operated; (2) non-State government-owned or operated; and (3) private owned and operated. Hospitals within a class can be paid different amounts and facility-specific total payment rates can vary, sometimes widely, so long as in the aggregate, the total amount that Medicaid FFS paid across the class is no more than what Medicare would have paid to those providers for those services.

When originally considering the Medicaid FFS UPL methodologies, we had concerns that applying the same standards for the total payment rate under SDPs to three classes based on ownership status, would not be appropriate for implementing the SDP requirements. We stated in the 2024 final rule, that § 438.6(c)(2)(ii)(B) provides States with broader flexibility than what is required for FFS UPLs in defining the provider class for which States can implement SDPs. This flexibility has proven important for States to target their efforts to achieve their stated policy goals tied to their managed care quality strategy. For example, we have approved SDPs where States proposed and implemented SDPs that applied to provider classes defined as all providers that are certified to serve as a Patient-Centered Medical Home (PCMH) and therefore, provide increased care coordination compared to providers that are not certified as PCMHs. Not all providers providing a particular service in Medicaid managed care programs must be included in an SDP. Under § 438.6(c)(2)(ii)(B), States are required to direct expenditures

equally, using the same terms of performance, for a class of providers furnishing services under the contract; however, they are not required to direct expenditures equally using the same terms of performance for all providers providing services under the contract. As we noted in the 2024 final rule, we could face challenges applying a similar UPL standard across provider classes under an SDP without some alignment between State defined classes and the FFS UPL framework.

In 2018, we ultimately interpreted § 438.6(c)(2)(i) to allow total payment rates in an SDP up to the ACR and required that States demonstrate, through a total payment rate comparison to the ACR, that total payment rates under the SDP would not exceed the ACR. We formalized this process in the revised preprint published in January 2021 and described it in the accompanying SMDL. Although we have collected this information for each SDP submitted for written prior approval, we historically requested the impact not only of the SDP under review, but any other payments made by the managed care plan (for example, other SDPs or pass-through payments) to any providers included in the provider class specified by the State for the same rating period.

When a State has not demonstrated that the total payment rate for each service and provider class included in each SDP arrangement is at or below either the Medicare or Medicaid FFS rate (when Medicare does not cover the service), we have generally requested documentation from the State to demonstrate that the total payment rate(s) that exceeds the Medicare or the Medicaid FFS rate do not exceed the ACR for the service and provider class. We have worked with States to collect documentation on the total payment rate, which has evolved over time.

With the growth of SDPs, oversight entities released reports focused on SDPs. In a December 2020 report,

the Government Accountability Office (GAO) raised concerns that States' reliance on provider taxes and local government funds used for IGTs effectively shifted responsibility for a larger portion of Medicaid payments to the Federal government and away from States. The Medicaid and CHIP Payment and Access Commission's (MACPAC) June 2022 Report to Congress on Medicaid and CHIP

recommended that CMS improve monitoring, oversight and transparency of SDPs. In December 2023,

GAO echoed similar concerns regarding SDP transparency and weak fiscal guardrails in the absence of codified SDP payment limits. We published the 2024 final rule to address these concerns, among other goals.

U.S. Government Accountability Office, “CMS Needs More Information on States' Financing and Payment Arrangements to Improve Oversight,” December 7, 2020, available at

https://www.gao.gov/assets/gao-21-98.pdf.

Medicaid and CHIP Payment and Access Commission, “Report to Congress on Medicaid and CHIP,” June 2022, available at

https://www.macpac.gov/wp-content/uploads/2022/06/MACPAC_June2022-WEB-Full-Booklet_FINAL-508-1.pdf.

U.S. Government Accountability Office, “Medicaid Managed Care: Rapid Spending Growth in State Directed Payments Needs Enhanced Oversight and Transparency,” December 14, 2023, available at

https://www.gao.gov/assets/gao-24-106202.pdf.

The 2024 final rule codified the standard in § 438.6(c)(2)(ii)(I) that each SDP must ensure that the total payment rate for each service, and each provider class included in the SDP must be reasonable, appropriate, and attainable and, upon request from us, the State must provide documentation demonstrating the total payment rate for each service and provider class. We also finalized § 438.6(a) to define “total payment rate” as the aggregate for each managed care program of: (1) the average payment rate paid by all MCOs, PIHPs, or PAHPs to all providers included in the specified provider class for each service identified in the SDP; (2) the effect of the SDP on the average rate paid to providers included in the specified provider class for the same service for which the State is seeking written prior approval; (3) the effect of any and all other SDPs on the average rate paid to providers included in the specified provider class for the same service for which the State is seeking written prior approval; and (4) the effect of any and all allowable pass-through payments, as defined in § 438.6(a), to be paid to any and all providers in the provider class specified in the SDP for which the State is seeking written prior approval on the average rate paid to providers in the specified provider class. Under this definition, although the total payment rate is collected for each SDP, the information provided for each SDP must account for the effects of all payments from the managed care plan (for example, other SDPs or pass-through payments) to any providers included in the provider class specified by the State for the same rating period.

Although this proposed rule does not propose any provisions that pertain to Medicaid Disproportionate Share Hospital (DSH) payments, we nevertheless want to use this opportunity to remind States about the interaction between SDPs and DSH. Under the statutory hospital-specific limits found in section 1923(g) of the Act, a hospital's DSH payments may not exceed the costs incurred by that hospital in furnishing inpatient and outpatient hospital services during the year to certain Medicaid beneficiaries and the uninsured, less payments received under Title XIX of the Act (other than section 1923 of the Act) and payments by uninsured patients. The 2008 Disproportionate Share Hospital Payments final rule (73 FR 77904) stated that Medicaid managed care payments are part of the calculation and reporting requirements for DSH. For purposes of Medicaid DSH, the 2008 final rule, defined “Medicaid MCO payments” as “payments from MCOs to hospitals for inpatient and outpatient services provided to Medicaid managed care enrollees” (73 FR 77920). In the 2016 final rule (81 FR 27498), we established SDPs, which we later characterized as payments made by the State directly to providers or at the direction of the State managed care plan for plan-covered services.

As such, SDPs paid to a hospital for inpatient or outpatient hospital services, when made in accordance with § 438.6(c), are regarded as payments for Medicaid services, and must be offset from costs when a State calculates the hospital-specific DSH limit.

SMDL #21-001, Additional Guidance on State Directed Payments in Medicaid Managed Care, January 8, 2021.

The 2024 final rule also finalized § 438.6(c)(2)(i), which excludes SDPs that set a minimum fee schedule using Medicaid State plan approved rates for a particular service (specified in § 438.6(c)(1)(iii)(A)) from the written prior approval requirement. An SDP that sets a minimum fee schedule at exactly 100 percent of the total published Medicare payment rate that was in effect no more than 3 years prior to the start of the applicable rating period for a particular service (specified in § 438.6(c)(1)(iii)(B)) also does not require written prior approval by us, as specified in § 438.6(c)(2)(i). We believe that both specific payment rates meet the requirement for reasonable, appropriate, and attainable total payment rates because we have reviewed and determined these payment rates to be appropriate under the applicable statute and implementing regulations for Medicare and Medicaid, respectively. However, for other SDP arrangements, we believed at the time of rulemaking that additional analysis and consideration was necessary to ensure that the payment rates directed by the

State meet the standard of reasonable, appropriate, and attainable.

To codify a payment limit for the service types that represented the largest proportion of SDP spending, the 2024 final rule also finalized § 438.6(c)(2)(iii) to establish a limit of 100 percent of the ACR for the total payment rate for each SDP for which written prior approval is required for inpatient hospital services, outpatient hospital service, nursing facility services, and qualified practitioner services at an AMC. In addition to this limit, we established specific standards for the data and documentation requirements necessary to demonstrate compliance with this limit. The 2024 final rule also finalized a definition of the ACR in § 438.6(a) to mean the average rate paid for services by the highest claiming third-party payers for specific services as measured by claims volume. Furthermore, we stated throughout the 2024 final rule that we were establishing a regulatory limit at 100 percent of the ACR for the total payment rate for each SDP for which written prior approval is required for these four service types, and would continue to use the ACR as the fiscal benchmark by which we would evaluate whether all SDP total payment rates are reasonable, appropriate, and attainable as specified in § 438.6(c)(2)(ii)(I) (89 FR 41065).

Beginning with the first rating period beginning on or after July 9, 2024, States were required to demonstrate compliance with these regulatory requirements, for SDPs for one or more of the four services by submitting both a total payment rate comparison using the ACR (that is, Table 2 in the currently published preprint) and an ACR demonstration that meets all of the requirements outlined under § 438.6(c)(2)(iii)(A). We require that the total payment rate comparison specified in § 438.6(c)(2)(iii)(B) be updated with each preprint renewal submission or amendment while the ACR demonstration must be updated at least once every 3 years thereafter, as specified in § 438.6(c)(2)(iii)(C). Operationally, this aligns with our historical practices but the data standards and regulatory definition of the ACR further refine the requirements for the commercial data to be used to demonstrate compliance with the ACR-based payment limit.

Both the volume of SDP preprints being submitted by States for approval and the total dollars flowing through SDPs have grown quickly since § 438.6(c) was established in the 2016 final rule. The number of States utilizing SDPs has increased from two States in 2016 to 41 States, in 2024. Currently, 83 percent of States with risk-based managed care delivery systems utilize SDPs. In 2024, over 80 percent of SDP preprint submissions were for hospitals, including inpatient and outpatient hospital services. Table 2 illustrates SDP total computable spending (Federal and non-Federal share) by service type from 2021 through 2024.

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SDPs account for a significant portion of managed care spending; they are estimated to be 26.4 percent of the total Medicaid managed care spending in FY 2025 and 28.1 percent by FY 2034, without any changes to the existing regulations.

The recent estimates for SDP spending developed by OACT project total computable spending to increase from $107.3 billion in FY 2024 to $295.9 billion in FY 2034 under current SDP regulatory requirements.

Based on CMS' Office of the Actuary (OACT) estimates as of March 2026.

Through our review process of SDP preprints since publication of the 2024 final rule in May 2024, we have become increasingly concerned with the growth in the percentage of total Medicaid managed care expenditures made through SDPs. The source of the non-Federal share also plays an important role in our concerns regarding SDPs that utilize an ACR payment rate. The significant increase in SDP spending since the 2024 final rule has demonstrated that States are increasingly relying on SDPs as a mechanism for increasing Federal funding for their Medicaid programs, including those where the non-Federal share is funded via IGTs and provider taxes, in other words, by the providers themselves rather than the State. See section II.A. of this proposed rule for discussion on SDPs and the source of the non-Federal share. As SDP spending continues to increase and given the total payment rate limit for certain SDPs mandated in section 71116 of the WFTC legislation, we believe it is appropriate to propose additional regulatory requirements with respect to the totality of provider payment rates under SDPs to ensure proper fiscal and programmatic oversight in Medicaid managed care programs. These proposed changes would also be consistent with the Presidential Memorandum issued on June 6, 2025.

We are issuing this proposed rule, including the requirements that implement section 71116(a) of the WFTC legislation, based on our authority to interpret and implement section 1903(m)(2)(A)(iii) of the Act, which requires contracts between States and MCOs to provide payment under a risk-based contract for services and associated administrative costs that are

actuarially sound, and our authority under section 1902(a)(4) of the Act to establish methods of administration for Medicaid that are necessary for the proper and efficient operation of the State plan. As explained in the 2016 final rule, regulation of SDPs is necessary to ensure that Medicaid managed care plans have sufficient discretion to manage the risk of covering the benefits specified in their contracts, which is integral to ensuring that capitation rates are actuarially sound as defined at § 438.4 (81 FR 27582). We have historically relied on section 1902(a)(4) of the Act to extend PIHPs and PAHPs the same requirements adopted in section 1903(m)(2)(A)(iii) of the Act for MCOs related to actuarially sound capitation rates.

E. Fee-for-Service Supplemental Payments

Section 1902(a)(30)(A) of the Act requires States to “assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.” States are responsible for developing FFS rates to pay providers for furnishing health care services to beneficiaries who receive covered services through the FFS delivery system. In recognition of the States' front-line responsibility, the statute affords States considerable flexibility by not prescribing any particular rate-setting approach or method for most Medicaid services, but instead allows States to develop their own approaches unique to their local circumstances so long as they are consistent with applicable statutory requirements and provide the public and interested parties an opportunity to comment and offer input (84 FR 63723).

Generally, a State that operates its Medicaid program using a FFS delivery system establishes a Medicaid State plan that comprehensively describes the nature and scope of a State's Medicaid program and assures conformity with Title XIX of the Act, to serve as a basis for Federal financial participation (FFP). The Medicaid State plan includes a description of the payments the State will make to enrolled Medicaid providers, which are generally comprised of base and supplemental payments. We have previously discussed base and supplemental payments in SMDL #21-006

and a proposed rule (84 FR 62722). In that SMDL, we described base payments as State payment methodologies that typically provide for a standard payment to all Medicaid providers on a per claim basis for services rendered to a Medicaid beneficiary in a FFS environment, including any payment adjustments, add-ons, or other additional payments made to a provider that can be attributed to services identifiable as having been provided to an individual beneficiary. Operationally, in a FFS delivery system, base payments are generally predetermined rates that States pay providers for specific services according to their Medicaid fee schedule. We note that per the Ensuring Access to Medicaid Services final rule, these fee schedules must be publicly available by July 1, 2026 (89 FR 40550).

https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf.

Supplemental payments are defined in section 1903(bb)(2) of the Act generally as payments made to providers that are in addition to the base payment the provider receives. Supplemental payments are generally understood to mean amounts other than the previously described base payment amount, and as such, may include payment for additional costs associated with Medicaid services. Because the term supplemental payments may refer to different types of payments in different contexts, within this proposed rule, we use the term supplemental payments when discussing payments that are in addition to base payments. However, we have not included this term in the specific provisions proposed later in this rule to ensure clarity of our intended scope and impact. We further note that while supplemental payments may seem like the FFS equivalent of managed care SDPs, and can serve similar functions, they should be viewed as separate concepts and discussions in this rulemaking and its proposed policies. We have endeavored to keep these discussions distinct to aid in ensuring a reader can fully understand the proposals for a particular delivery system.

For a number of years, States have been making FFS supplemental payments under the Medicaid State plan that are targeted to certain practitioners, such as physicians, dentists, emergency and non-emergency medical transportation providers (for example, ground emergency medical transportation (GEMT) providers, air emergency transportation providers, and non-emergency medical transportation (NEMT) providers) and other licensed professionals. We generally utilize the term provider when referring to an entity, such as a transportation provider or Certified Community Behavioral Health Clinic (CCBHC) provider, and the term practitioner when referring to an individual, such as a physician. Because our current guidance

for ACR payments uses the term practitioner broadly to include physicians and transportation providers, we have generally maintained that terminology in this rule. However, as discussed later in this proposed rule, some providers, such as transportation providers, are also included in the scope of this rule.

https://www.medicaid.gov/medicaid/financial-management/downloads/upl-guidnce-qualified-practitioner-services-2022.pdf.

Most commonly for physicians and dentists, States have targeted supplemental payments to practitioners affiliated with and furnishing services in AMCs and safety net hospitals. For transportation providers and other licensed professionals, States often have targeted supplemental payments to State or non-State government owned or operated entities, such as a county fire station, that fund the non-Federal share of the supplemental payment with an IGT. For these payments, States have used what is commonly described as an ACR calculation to establish an upper limit for these practitioner supplemental payments. The ACR is the average rate paid by commercial third-party payers for specific medical service codes (usually current procedural terminology (CPT) codes) to practitioners or providers, which is multiplied in the ACR calculation by the Medicaid claims for each code to establish an upper limit for these supplemental payments. For FFS supplemental payments, States can also calculate the Medicare equivalent of the ACR, discussed in more detail later.

We first approved ACR-based supplemental payments for physician services in the early 2000s. Since then, States have proposed and received our approval for supplemental payments calculated using the ACR for physicians, dentists, providers of medical transportation, and other practitioners under State plan authority. Like all FFS payments made under State plan authority, ACR-based supplemental payments are subject to section 1902(a)(30)(A) of the Act, which requires payments to be consistent with efficiency, economy, and quality of care, and sufficient to enlist enough providers. We interpret section 1902(a)(30)(A) of the Act as requiring a balanced approach to Medicaid rate-setting and we encourage States to use appropriate information and program experience to develop rates to meet all of the statute's requirements. Further, we expect States to document that

Medicaid rates are economic and efficient when the State submits changes to payment methodologies through a SPA. To support States proposing supplemental payments calculated using the ACR, we previously issued sub-regulatory guidance regarding three payment methodologies generally utilized for payments made to physicians and practitioners—(1) payment up to the Medicare Physician Fee Schedule (MPFS) rate; (2) calculation of the ACR; and (3) calculation of the Medicare equivalent of the ACR (calculating the average payment amount allowed by commercial payers as a percentage of Medicare to determine an upper limit).

https://www.medicaid.gov/medicaid/downloads/upl-instructions-qualified-practitioner-services-replacement-new.pdf.

For States that propose a supplemental payment up to the MPFS rate, the State Plan must comprehensively describe the payment methodology the State uses to calculate the supplemental payment in accordance with § 430.10. This includes, but is not limited to, the percentage (for example, 100 percent) of the MPFS the State will pay, the version (for example, the January 2025 fee schedule) of the MPFS the State will implement, whether the State will apply geographic practice cost indexes (GPCIs) that reflect geographic cost differences as defined by Medicare, and which site of service rate (facility or non-facility) the State will utilize. CMS verifies this information is included in SPAs proposing supplemental payments up to the MPFS rate.

For States that propose a supplemental payment and opt to calculate an ACR or Medicare equivalent of the ACR, States must calculate and submit a UPL demonstration of the proposed supplemental payment for compliance with section 1902(a)(30)(A) of the Act, in addition to comprehensively describing in the State Plan the payment methodology the State uses to calculate the supplemental payment in accordance with § 430.10. For States that calculate an ACR, CMS expects States to recalculate the UPL annually and submit this demonstration to CMS for review. For States that calculate the Medicare equivalent of the ACR, States are expected to recalculate at least every 3 years and submit this demonstration to CMS for review.

When States propose to utilize an ACR methodology (payment up to the ACR or Medicare equivalent of the ACR) to target payments to physicians or other practitioners, States submit data to CMS from each practitioner's top (generally five) commercial payers and provide an explanation of the data that was extracted from the practitioners' accounts receivable systems. The State compares the Medicaid payment for each billing code directly to either: (1) the average payment amount allowed by commercial payers for the same services, or (2) the Medicare equivalent of the commercial payers' average payment amount for the same services. The submitted ACR calculation includes data from each of the practitioners, group practices, or hospital-based practitioner groups eligible to receive the supplemental payment.

We issued SMDL #13-003 on March 18, 2013 to reaffirm mutual obligations and accountability on the part of the State and Federal governments for the integrity of the Medicaid program and the development, application, and improvement of program safeguards necessary to ensure proper and appropriate use of both Federal and State dollars.

In SMDL #13-003, we stated our expectation that States submit annual UPL demonstrations for targeted physician

supplemental payments beginning in 2014. Beginning in 2019, and modified in 2022, States began submitting UPL demonstrations using the OMB-approved templates for Qualified Practitioner Services. In 2021, we issued guidance for Medicaid Qualified Practitioner Services to support States in developing their UPL demonstrations for demonstrating compliance with section 1902(a)(30)(A) of the Act.

We revised this guidance to align with the most current UPL template for Qualified Practitioner Services in 2022.

Apart from this information provided in guidance, our regulations have been silent regarding payment limits for these types of providers.

https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/SMD-13-003-02.pdf.

Note that in this SMDL, we used the terminology “physician,” but have since adopted the terminology “practitioner” for the relevant supplemental payments, as they can apply to individuals that may not be physicians, such as other licensed practitioners.

We initially referred to physicians specifically but later expanded to “practitioners” to account for the practitioners other than physicians that provide professional services.

See

https://www.medicaid.gov/medicaid/financial-management/downloads/upl-instructions-qualified-practitioner-services-06012021.pdf

and also

https://www.medicaid.gov/medicaid/downloads/upl-guidance-qualified-practitioner-services-replacement-new.pdf.

https://www.medicaid.gov/medicaid/financial-management/downloads/upl-guidnce-qualified-practitioner-services-2022.pdf.

In 2019, we issued a proposed rule with many financial provisions, one of which proposed to limit these types of supplemental payments (84 FR 63722),

which would have implemented a UPL regulation like those that already existed for other payments. We proposed this change based on concerns that States were making practitioner payments that were not economic and efficient, consistent with section 1902(a)(30)(A) of the Act, and that they presented an oversight risk because they were based on proprietary commercial payment data and thus not readily verifiable or auditable. The 2019 proposed rule was much broader in scope in terms of the number of financial and payment topics than this proposed rule. While the entirety of the 2019 proposed rule was subsequently withdrawn in January 2021, we indicated at the time that the withdrawal action did not limit our prerogative to make new regulatory proposals in the areas addressed by the withdrawn proposed rule, including new proposals that may be substantially identical or similar to those described therein (86 FR 5105).

https://www.federalregister.gov/documents/2019/11/18/2019-24763/medicaid-program-medicaid-fiscal-accountability-regulation.

The Consolidated Appropriations Act, 2021 (CAA) was enacted on December 27, 2020.

It established a number of new requirements for State Medicaid programs, including the addition of section 1903(bb) of the Act to specify new reporting requirements for supplemental payments. We issued guidance in SMDL #21-006, “New Supplemental Payment Reporting and Medicaid Disproportionate Share Hospital Requirements under the Consolidated Appropriations Act, 2021,”

to address the new requirements, and since 2022, we have received more detailed supplemental payment data from States reported in the CMS-64. Table 3 shows the total reported supplemental payments since this requirement was implemented for physicians, other licensed practitioners (OLP), and GEMT.

Public Law 116-260.

https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf.

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As reported on the Form CMS-64 data (the quarterly Medicaid statement of expenditures), States claimed approximately $2.63 billion (total computable) in expenditures for supplemental payments (including ACR-based payments but excluding DSH and any Medicare UPL payments) made to physicians, other licensed practitioners, and ground emergency medical transportation providers for FFY 2024. Over 60 percent of total supplemental payments ($1.6 billion total computable) were made to just 1,975 physicians or physician practices across 24 States that make supplemental payments to physicians. Currently approved ACR-based supplemental payments in States using the Medicare equivalent of the ACR average 207 percent of the Medicare rate for physicians and 153 percent for other licensed practitioners (for example, dentists and GEMT providers). While an outlier, one State currently pays ACR-based supplemental payments at 530 percent of Medicare equivalent of the ACR for physicians. Based on our analysis of State expenditure data, as further discussed in section II.B of this proposed rule, these targeted payments present clear oversight risks to Federal taxpayer dollars for which CMS is a financial steward. We recognize this is an opportune time to consider changes to our policies to address a similar problem across both delivery systems, FFS and managed care, in light of the changes made to SDPs by section 71116 of the WFTC legislation.

II. Provisions of the Proposed Regulations

We intend that if any provision in this proposed rule, if finalized, is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it shall be severable from the final rule (if and once finalized) and not affect the remainder thereof or the application of the provision to other persons not similarly situated or to other, dissimilar circumstances. This notice proposes provisions that are meant to and would operate independently of each other, even if each serves the same general purpose or policy goal. Where a provision is necessarily dependent on another, the context generally makes that clear (such as by a cross-reference to apply the same standards or requirements).

A. State Directed Payments in Medicaid Managed Care (§ 438.6)

Since publication of the 2024 final rule, we have received over 400 SDP preprint submissions from 41 States. Some of these submissions represent brand new SDPs or renewals of existing SDPs for which the total dollar amount attributable to the SDP has increased significantly. Many of these proposed SDPs bring provider payment rates up to 100 percent of the ACR or, in some cases, in excess of 100 percent.

Recent State SDP submissions include:

These examples include preprints submitted by States to CMS but do not necessarily represent approved SDPs; CMS does not approve SDPs that exceed 100 percent of the ACR.

• A new $3.2 billion SDP for all inpatient and outpatient hospital services within the State that directs managed care plans to make an 186 percent uniform increase payment to bring average provider payments up to 100 percent of the ACR.

• A $13 billion renewal SDP for inpatient and outpatient hospital services provided at all private hospitals in the State that would require managed care plans to make uniform dollar increase payments up to $5,146 per hospital service. This is the highest dollar amount SDP CMS has received to date and represents an 80 percent increase in the total SDP dollar amount requested compared to the prior rating period.

• A new $1.3 billion SDP for physician services that would require managed care plans to make uniform percentage increases of up to 634 percent per physician service to bring average payments up to 142 percent of the ACR.

• One State submitted 16 new SDPs for hospital services and qualified practitioner services at AMCs, each limited to a single hospital, totaling nearly $1.5 billion across the 16 SDPs. Each SDP would require different uniform increases that would bring each hospital up to between 27 percent and 100 percent of the ACR. Based on information submitted in the preprints, the SDPs appear to be designed to reward providers that finance the non-Federal share, rather than to meet the goals and objectives of the State's Medicaid program, including improving access to care, and enhancing quality of care in Medicaid managed care.

The 2024 final rule included projections that under the new regulatory requirements, including the ACR limit for certain services, SDP spending would increase to $74.9 billion in FY 2024 and up to $115.1 billion in FY 2028. However, more recent estimates developed by OACT based on SDP submissions approved through December 2024, project SDP spending to increase to $97.8 billion in FY 2024 and $246 billion in FY 2034 under current SDP regulatory requirements. These updated estimates indicate a substantial increase from the projections in the 2024 final rule and underscore the need to consider additional fiscal integrity protections to promote the long-term sustainability of the Medicaid program. The source of the non-Federal share also plays an important role in our concerns regarding SDPs that utilize an ACR payment rate. The significant increase in SDP spending since the 2024 final rule suggests that States are increasingly relying on SDPs as a mechanism for increasing Federal funding for their Medicaid programs, including those funded via IGTs and provider taxes without commensurate State general fund contributions toward the non-Federal share.

SDPs that result in total provider payment rates up to the ACR are most frequently funded by provider taxes and IGTs from local government sources or State university teaching hospitals and generally include only providers that have the ability to fund the non-Federal share of the ACR payments. It appears that, in some instances, these types of SDPs are often primarily developed

based on the amount of available funding from providers rather than to drive improvements in access to or quality of care for beneficiaries or to achieve other, similar programmatic goals. For SDPs that were projected to exceed 100 percent of Medicare up to 100 percent of the ACR, States financed the underlying non-Federal share as follows: 39.8 percent were funded in part or wholly by IGTs (but not provider taxes), 26.9 percent were funded in part or wholly with provider taxes (but not IGTs), and 14.2 percent were funded in part or wholly by both IGTs and provider taxes. In total, 80.8 percent of SDPs that exceeded Medicare payment rates, including those up to the ACR, were funded in part or wholly via IGTs and/or provider taxes.

When these IGTs or provider taxes are used, the State Medicaid agency does not contribute general funds for the non-Federal share of the associated payments because the funding comes from separate governmental entities (in the case of IGTs) or providers.

This is based on an analysis conducted in June 2025 of 402 SDPs approved by CMS between January 1, 2022 and December 31, 2024 where the total payment rate was projected to exceed Medicare payment rates or up to the ACR. The analysis excludes (1) COVID-19 expedited reviews and (2) SDP arrangements related to HCBS covered by section 9817 of the American Rescue Plan Act of 2021 and (3) SDPs where the State projected the total payment rate to be less than or equal to Medicare and (4) that total payment rate was not compared to the Medicare or ACR.

States have multiple methods to generate the non-Federal share (also known as the State share) to finance their Medicaid programs, including IGTs and health care-related taxes. These sources, while generally permissible, present the need for greater scrutiny, because the State is oftentimes collecting money to fund the non-Federal share for SDPs from the same entities that then receive those payments, resulting in higher provider payment rates than they would have received if they had not contributed funding via IGTs or provider taxes. We have taken recent steps to address impermissible arrangements related to financing sources but recognize the importance of examining the nature of the payments the State makes under these structures. SDPs and supplemental payments that reflect these financing patterns can result in payment levels that are not clearly aligned with Medicaid utilization, quality, health outcomes, or other program goals. These payments in turn drive significant Medicaid spending increases without a clear connection to quality or outcomes for Medicaid beneficiaries. Further, when the funds to support the non-Federal share of increased payments originate from the same providers that receive enhanced payments, the resulting spending increases raise fiscal integrity concerns for the Medicaid program and increase the burden on the Federal treasury and taxpayers.

In the 2023 proposed rule, we considered a total payment rate limit at 100 percent of the total published Medicare payment rate instead of the ACR, noting that Medicare payment rates are a standardized benchmark used in the healthcare industry (88 FR 28124). Compared to proprietary commercial data, Medicare payment rate data may be more easily verified and audited because Medicare payment rates are published yearly and available to the public. We also acknowledged that setting the limit at Medicare would serve to limit the growth in Medicaid managed care spending relative to an ACR limit. Many of the public comments received on the 2023 proposed rule supported an SDP payment limit at the total published Medicare payment rate, citing payment transparency, payment comparability among the largest public payers in the nation, and concerns that a limit at the ACR could accelerate Federal Medicaid spending. We also received comments supportive of an SDP total payment limit at the ACR for four services. These commenters noted concerns with finalizing a limit lower than the ACR, asserting that would reduce the ability of managed care plans to compete with commercial plans for providers to participate in their networks and could result in a reduction of access, particularly for States that already have SDPs at ACR (89 FR 41066). In the 2024 final rule, we finalized the limit on the total payment rate at no greater than 100 percent of the ACR and reminded States that they are not required to utilize SDPs and that there are separate regulatory requirements that require States that contract with a managed care plan to deliver Medicaid services to address network adequacy and access to care, regardless of the use of SDPs (89 FR 41066).

On July 4, 2025, President Trump signed the WFTC legislation into law. Section 71116 of the WFTC legislation directed the Secretary to reduce the total payment rate limit for certain SDPs for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an AMC. Section 71116 of the WFTC legislation also included a provision allowing a temporary grandfathering period for certain SDPs until the rating period beginning on or after January 1, 2028, at which point such SDPs would be required to gradually transition down to the new payment limit. Our proposals in this rule seek to implement these provisions and, if finalized, could slow the growth of SDP spending in the future.

1. Payment Limit for SDPs (§ 438.6 (a), 438.6(c)(2)(ii)(I) and 438.6(c)(8))

The WFTC legislation and the Presidential Memorandum reflect what our experience reviewing SDPs since the 2024 final rule has demonstrated: the total published Medicare payment rate or the Medicaid State Plan rate are reasonable payment limits for SDPs compared to the ACR. The WFTC legislation and the Presidential Memorandum are consistent with concerns we have identified through our experience reviewing SDPs since the 2024 final rule, including that an SDP total payment rate limit of 100 percent of the ACR can contribute to substantial growth in SDP expenditures. The current payment limit framework may also contribute to financing arrangements that raise fiscal integrity concerns and reduce incentives for shared State funding responsibility. Using Medicare or Medicaid State plan rates as the payment limit for SDPs would bring consistency and predictability and could help moderate the growth of SDP expenditures while providing States flexibility to pursue provider payment initiatives and delivery system reform efforts that further advance access to care and enhance quality of care in Medicaid managed care.

Medicare payment rates are developed under Title XVIII of the Act and there are annual rulemakings associated with Medicare payment for benefits available under Medicare Parts A and B in the Medicare FFS program. Medicare payment rates are consistently and rigorously developed and vetted by us and are subject to public notice and comment periods. In our experience, many managed care plans use Medicare FFS rates as a benchmark as part of their provider payment negotiations. They are the only complete and reliable set of provider payment rates published annually and are freely and easily accessible to CMS, providers, States, managed care plans, interested oversight bodies, and the general public. Additionally, published Medicare payment rates are often utilized in the Medicare managed care delivery system. For example, section 1852(a)(2) of the Act provides that Medicare

Advantage

plans pay out-of-network providers at least the amount payable under Medicare FFS for benefits available under Medicare Parts A and B, taking into account cost sharing and permitted balance billing.

Medicare+Choice is the former name for Medicare Advantage, as it was renamed by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

There is precedent for Medicaid alignment with Medicare payment rates. Medicaid FFS delivery systems currently use Medicare payment rates for the majority of regulatory UPLs (for further discussion of the existing UPLs that use Medicare in FFS programs, see section II.B.1 of this proposed rule). In the 2024 final rule under § 438.6(c)(2)(i), we removed the requirement for our written prior approval for SDPs that use a minimum fee schedule at 100 percent of the total published Medicare payment rate in effect no more than 3 years prior to the start of the rating period. We did this to acknowledge that total published Medicare payment rates met our regulatory standard requiring all SDPs to result in provider payments that are reasonable, appropriate, and attainable. We believe that the total published Medicare payment rate or State plan approved rate represent a reasonable payment limit for Medicaid services when a State is directing payment via a SDP.

The proposed limits to Medicaid managed care expenditures in this proposed rule would only apply when providers receive payments through SDPs (that is, when States opt to direct Medicaid managed care expenditures as permitted under § 438.6(c)). Absent SDPs, Medicaid managed care plans may continue to negotiate provider payment rates that exceed this payment limit when necessary to ensure a sufficient provider network. We remind States that under § 438.6(c)(1), States are not permitted to direct managed care plan expenditures in any way, outside of the permissible regulatory options outlined in § 438.6(b) through (d) or as specified in statute; we are not proposing any revisions to this provision. To curtail the growth in Medicaid managed care spending as a result of SDPs, implement the mandate in the WFTC legislation, protect the fiscal integrity and future of the Medicaid program, and promote transparency, we propose revisions to § 438.6(a) and (c) as outlined in the next paragraph.

Regulatory Revisions Required by WFTC Legislation

Section 71116(a) of the WFTC legislation requires the Secretary to revise § 438.6(c)(2)(iii) to enact a new total payment rate limit with respect to a payment described in that section for all 50 States and DC, although it does not apply to the U.S. territories. Sections 71116(b) and (c) of the WFTC legislation establish transition and applicability rules for certain payments and States. This would establish a new regulatory limit for SDPs that require written prior approval and include any of the four services specified in § 438.6(c)(2)(iii).

Section 71116(a) of the WFTC legislation also specifies that this new payment limit is to be applicable to services furnished during a rating period

beginning on or after the date of enactment of the WFTC legislation (July 4, 2025), unless the SDP is eligible for a temporary grandfathering period (see section II.A.2. of this proposed rule). The total payment rate limit specified in section 71116(a) of the WFTC legislation for SDPs that include any of the four services is 100 percent of the total published Medicare payment rate for an expansion State, or 110 percent of the total published Medicare payment rate for a non-expansion State with respect to a payment made for a service furnished during an applicable rating period. In the absence of a total published Medicare payment rate for the Medicaid covered service, section 71116(a) of the WFTC legislation specifies that the total payment rate is limited to the payment rate under the Medicaid State plan (or under a waiver of such plan). We propose to codify these provisions in § 438.6(a) and (c).

Each service type is defined at § 438.6(a).

“Rating period” is defined at § 438.2 as a period of 12 months selected by the State for which the actuarially sound capitation rates are developed and documented in the rate certification submitted to CMS as required by § 438.7(a).

b. Regulatory Revisions for Other SDPs, Services and Territories

Section 1903(m)(2)(A) of the Act requires contracts between States and MCOs to provide payment under a risk-based contract for services and associated administrative costs that are actuarially sound. Under risk-based managed care arrangements with States, Medicaid managed care plans have the responsibility to negotiate payment rates with providers. Subject to certain exceptions, States are not permitted to direct the expenditures of a Medicaid managed care plan under the contract between the State and the plan or to make direct payments to providers for services covered under the contract between the State and the plan (§§ 438.6 and 438.60, respectively). However, there are circumstances under which requiring managed care plans to make specified payments to health care providers is an important tool in furthering the State's overall Medicaid program goals and objectives. While this type of State direction reduces the plan's ability to effectively manage costs, it can be an important tool for States. In the 2016 final rule, we established specific exceptions to the general rule prohibiting States from directing the expenditures of MCOs, PIHPs and PAHPs in § 438.6(c)(1)(i) through (iii). These exceptions came to be known as State directed payments (SDPs). When SDPs are utilized, States are required to ensure that the capitation rates, inclusive of SDPs, under the risk-based contract for services covered under that contract and the associated administrative costs are actuarially sound. We use our authority under section 1902(a)(4) of the Act to apply the same requirements to contracts between States and PIHPs or PAHPs. Under our authority to interpret and implement sections 1902(a)(4) and 1903(m)(2)(A)(iii) of the Act we propose to extend these provisions and the payment limit to all SDPs and in all States, DC and the U.S. Territories. Our proposals are explained in greater detail further in this section.

a. Definitions

First, we address the existing definition of “total published Medicare payment rate” in § 438.6(a) which section 71116(d)(4) of the WFTC legislation adopts by reference. While the phrase “specified total published Medicare payment rate” is used in section 71116(a) of the WFTC legislation, we believe this phrase aligns with the existing definition of the total published Medicare payment rate to mean amounts calculated as payment for specific services that have been developed under title XVIII Part A and Part B of the Act. Since the regulatory definition already includes the word “specific” and we have always interpreted it to mean the exact total published Medicare payment rate for a specific service furnished to a Medicaid managed care enrollee, we do not believe it is necessary to revise our existing definition of “total published Medicare payment rate.” We therefore interpret the existing definition to apply wherever section 71116 of the WFTC legislation uses the phrase “specified total published Medicare payment rate.”

In the absence of a total published Medicare payment rate for a Medicaid covered service, section 71116(a)(1) and (2) of the WFTC legislation specifies that the payment rate for each of the four service types is limited to the “payment rate under the Medicaid State plan (or under a waiver of such plan).” We believe that our existing definition of “State plan approved rates” under § 438.6(a) is aligned definitionally with “payment rate under the Medicaid State plan.” We have always interpreted the definition of State plan rates to include rates that are approved via a waiver of the State plan, such as through a waiver under section 1915(c) of the Act (see, for example, 81 FR 27537). As specified in § 438.6(a), State plan approved rates do not include supplemental payments, which are defined under § 438.6(a) as amounts paid in addition to State plan approved rates. We are proposing to revise the definition of “State plan approved rates” at § 438.6(a) to strike the phrase “CMS approved” and amend the latter part of the sentence to read “described under rate methodologies in the Medicaid State plan approved by CMS before the start of the rating period.” We believe this revision is necessary to address timing misalignment between the SPA approval process and the prospective nature of risk-based managed care. States are permitted to submit SPAs at any time during a State fiscal quarter which can then be approved by us for an effective date retroactive to the start of the quarter. The SPA review process is also lengthy and sometimes takes years to reach a conclusion. In an FFS delivery system, the State may choose to make payments under a submitted SPA prior to approval,

or, once the SPA is approved retroactive to the start of the State fiscal quarter in which it was submitted the State may make retroactive payments to FFS providers to account for the payment differential for services rendered when the SPA was retroactively in effect.

If the SPA is ultimately not approved, the State risks disallowance of the related FFP.

In a managed care environment if a State directs their plans to pay providers a minimum fee schedule SDP using State plan approved rates, the State's actuaries will develop the capitation rates based on the State plan approved rates in effect for the applicable rating period, consistent with the actuarial soundness and prospective rate development requirements in §§ 438.4 and 438.7. If a SPA is not approved until the managed care rating period is underway or completed and the State wishes to direct plans to implement those updated payment rates via an SDP retroactive to the effective date of the approved SPA, they must submit both contract amendments and rate certifications to effectuate those changes. We have observed that these types of retroactive revisions to SDPs can create inconsistencies between certified capitation rates and actual plan payment obligations, lead to inaccurate implementation, cause uncertainty for providers, and hamper post payment validation efforts. We believe that requiring States to use the State plan rates approved before the start of the rating period would be consistent with prospective rate-setting processes and would add stability and predictability to SDPs. This change does not alter SPA approval authority under title XIX of the Act, but instead specifies how approved State plan rates may be implemented as a minimum fee schedule SDP and used for prospective capitation rate development in managed care.

For SDPs that require written prior approval and include any of the four service types specified in section 71116(a) of the WFTC legislation in the 50 States and DC, the WFTC legislation requires different SDP payment limits depending on whether the State has implemented Medicaid expansion, specified in section 71116(a)(1) of the WFTC legislation as a State that provides coverage to all individuals described in section 1902(a)(10)(A)(i)(VIII) of the Act (42 U.S.C. 1396a(a)(10)(A)(i)(VIII)) that is equivalent to minimum essential coverage (as described in section 5000A(f)(1)(A) of the Internal Revenue Code of 1986 and determined in accordance with standards prescribed by the Secretary in regulations) under the State plan (or waiver of such plan) of such State under title XIX of such Act. In section 71116(a)(1) of the WFTC legislation, the total payment rate limit is 100 percent of the total published Medicare payment rate for States that meet this definition of “Expansion State.” Section 71116(a)(2) of the WFTC legislation cross-references section 71116(a)(1) to specify that in the case of a State other than a State described in section 71116(a)(1) of the WFTC legislation, the total payment rate limit is 110 percent of the total published Medicare payment rate. We propose to add the term “Expansion State” to § 438.6(a) and propose a streamlined version of the definition in section 71116(a)(1) of the WFTC legislation to mean a State that provides medical assistance to all individuals described in section 1902(a)(10)(A)(i)(VIII) of the Act under a State plan under title XIX of such Act or under a waiver of such plan that provides minimum essential coverage as defined in section 5000A(f)(1)(A) of the Internal Revenue Code of 1986. We propose to also add the term “Non-Expansion State” that would mean a State that does not meet the definition of “Expansion State.”

Section 71116(d)(3) of the WFTC legislation defines “State” to mean 1 of the 50 States or DC We have historically not differentiated between the 50 States, DC, or U.S. territories with regards to the regulatory requirements for SDPs. The Presidential Memorandum also did not differentiate or distinguish between States, DC, or U.S. territories. We believe it is prudent and necessary for the fiscal integrity of the Medicaid program that we apply the payment limit to all States, DC, and the territories, as we have historically done. Therefore, we propose to add the term “State” to § 438.6(a) to mean, as used in § 438.6(c)(8)(ii) only and only until the first rating period beginning on or after January 1, 2029, the Single State agency of one of the 50 States or DC We also propose that the definition of “State” would, at other times and for other purposes in this section, unless otherwise specified, have the meaning given the term in § 438.2 of this part. This would have the effect of imposing the payment limit on SDPs for the U.S. territories with the first rating period on or after January 1, 2029, while retaining the applicability of all other SDP requirements to a

State

as defined in § 438.2, including the U.S. territories, before that date. See section II.A.1.B. of this proposed rule for discussion of proposed payment limits and applicability dates.

To streamline the regulatory text under § 438.6 and reduce redundancies, we propose to add the term “Payment limit” to § 438.6(a) as 100 percent of the total published Medicare payment rate for an Expansion State, 110 percent of the total published Medicare payment rate for a Non-Expansion State, and 100 percent of the State plan approved rate when there is no total published Medicare payment rate for the covered service. This definition would align with the SDP payment limits delineated in section 71116(a) of the WFTC legislation. We propose that the Medicare payment limit would differ for Expansion and Non-Expansion States as is required under section 71116(a) of the WFTC legislation for the 50 States and DC for SDPs that include any of the four services and require written prior approval. Section 71116(a)(1) and (2) of the WFTC legislation also provides that, in the absence of specified total published Medicare payment rate, the

applicable payment rate is the payment rate under a Medicaid State plan (or under a waiver of such plan). Because the statute refers to “the payment rate under a Medicaid State plan” and does not modify that phrase to specify an applicable percentage for either an Expansion State or a Non-Expansion State, we interpret section 71116(a)(1) and (2) of the WFTC legislation to require that the exact rate(s) approved under the Medicaid State plan serve as the payment limit in the absence of a total published Medicare payment rate for a covered service, regardless of whether the State is an Expansion State or a Non-Expansion State.

We believe this approach is appropriate and reasonable because State plan approved rates are reviewed and approved through the State plan amendment process, which includes State-specific review of each submission, as discussed further in this section of the rule.

If Congress had intended instead to specify an alternative rate of 110 percent of the payment rate under the Medicaid State plan in the case of a Non-Expansion State, this could have been done, for example, by specifying “(or, in the absence of a total published Medicare payment rate, of the payment rate under a Medicaid State plan (or under a waiver of such plan))” in section 71116(a)(2) of the WFTC legislation.

Proposed FFS Medicare payment rates under Medicare Parts A and B are typically published via an annual notice of proposed rulemaking in late spring and summer, are subject to an open comment period, and then published in a final rule in fall or winter of each year. The effective date of the total published Medicare payment rates varies by fee schedule but is typically tied to either the calendar year (CY) or Federal fiscal year (FFY). Table 4 outlines selected Medicare FFS payment systems through which these payment rates are established, and the periodicity of rule publication. The table is not inclusive of all total published Medicare payment rates.

EP22MY26.003

While

States may choose to implement SDPs, including those that do not require prior approval, in alignment with the most recently released total published Medicare payment rate(s), during the period those rates are in effect, States are reminded that they are required to comply with existing requirements for SDP submission and contract documentation. Beginning with rating periods starting on or after July 9, 2026, States are required to comply with § 438.6(c)(2)(viii) and submit all SDP preprints prospectively; that is, before the start date of the applicable SDP arrangement. This provision is intended to facilitate more timely and accurate implementation of SDPs by managed care plans by ensuring that they have ample notice of each SDP they are being directed to implement. We noted in the 2024 final rule that requiring States to submit preprints in advance of the start date of the arrangement (89 FR 41054) and document them in plan contracts within 120 days of the SDP start date

would ensure efficient administration of contract and rate certification reviews (89 FR 41101 through 41102). This approach is also better aligned with the prospective nature of risk-based managed care. In addition, under § 438.7(c)(6), States are required to submit the rate certification or retroactive adjustment to capitation rates resulting from an SDP no later than 120 days after the start date of the SDP.

States are required to meet all of these requirements when implementing any SDP, including when they seek to align an SDP, the associated contracts and certified capitation rates with updates to the total published Medicare payment rates that also serve as the basis of the applicable payment limit. This is especially important for periodic updates to Medicare fee schedules that are misaligned with States' rating periods for Medicaid managed care programs.

https://www.congress.gov/crs-product/R46797#:~:text=%22The%20Secretary%20shall%20provide%20for,subsection%20for%20that%20fiscal%20year.%22.

Finalized in § 438.6(c)(5)(v) beginning with the first rating period on or after July 9, 2028.

States are required to comply with all of relevant regulatory requirements in § 438.7(c), including the requirements at §§ 438.7(c)(2) and 438.7(c)(5). These provisions outline the requirements for retroactive adjustments to the capitation rates.

We specifically propose to apply the payment limit to each service included under an SDP as section 71116(a) of the WFTC legislation references “the payment rate for such service” when addressing the applicability of the payment limit. We also believe that this interpretation is aligned with the Presidential Memorandum which directs the Secretary to ensure “Medicaid payments rates are not higher than Medicare . . .” We interpret the term “payment rate(s)” in both the WFTC legislation and the Presidential Memorandum to mean the specific payment rate for a service furnished by a provider. Under our proposed definition of “Payment limit” in § 438.6(a), the total published Medicare payment rate would therefore serve as the basis of the payment limit for each service rendered to a Medicaid managed care enrollee when that service is included in an SDP. The SDP payment limit would not be calculated at an aggregate level, using a UPL-like approach that mirrors what is done to implement many existing payment limits in Medicaid FFS. Rather, the payment limit would be calculated at a service or discharge specific level, whether it be at the HCPCS code level or for Medicare Severity Diagnosis-Related Groups (MS-DRGs) as is used for Medicare IPPS. Neither section 71116 of the WFTC legislation nor the Presidential Memorandum references aggregate Medicare-equivalent payments or a UPL methodology. Therefore, we propose to implement the limit on a per service or per discharge basis.

We acknowledge that the “total published Medicare payment rate” as defined in § 438.6(a), may include applicable Medicare payment adjustments, including but not limited to geographic and quality adjustments. As discussed in the 2024 final rule (89 FR 41049), the total published Medicare payment rate is inclusive of all components included in the rate

developed by CMS for Medicare payment. In addition to the Medicare payment final rules, we also publish web pricers or fee schedules

for all total published Medicare payment rates and offer free, executable code for those web pricers.

We would expect States to use these Medicare tools, which are validated and inclusive of all the necessary Medicare components and adjustments that comprise the total published Medicare payment rate, when determining the applicable payment limit for payments to providers under an SDP.

For example, the Medicare Physician Fee Schedule can be found online:

https://www.cms.gov/medicare/physician-fee-schedule/search/overview.

https://www.cms.gov/pricersourcecodesoftware.

While the vast majority of Medicare services are paid based on prospectively published payment rates, several hospital types are exempt from prospective payment systems, some providers are instead paid using a cost-based payment methodology.

Medicare providers that are reimbursed by Medicare on a cost-basis include critical access hospitals (CAHs), certain cancer hospitals, and freestanding children's hospitals. Hospital payment rates determined using a cost-based methodology are not published nor are they subject to review and public comment. Hospitals reimbursed by Medicare on a cost basis are required to submit cost reports to CMS using Medicare approved cost reporting principles during the cost reporting period.

Medicare contractors validate these cost reports and the providers are generally paid for the proportion of allowable costs attributed to Medicare FFS beneficiaries.

Typically, these providers receive interim payments based on estimated costs that are then reconciled to actual costs after the end of the cost reporting period.

This retrospective approach for annual cost reports poses operational and policy concerns for determining compliance with the applicable payment limit for SDPs under section 71116 of the WFTC legislation. In a Medicaid managed care delivery system, actuarially sound capitation rates are determined prospectively, and beginning with rating periods starting on or after July 9, 2026, States must submit SDP preprints to CMS prospectively under § 438.6(c)(2)(viii). The prospective nature of risk-based managed care makes it difficult to impose and monitor a per service SDP payment limit when the SDP payment limit for a provider is tied to a retrospective cost report.

§ 412.23.

§ 413.24.

§ 413.50.

§ 413.60.

For providers paid under a cost-based methodology in Medicare, we believe it would be appropriate to consider the cost-based payment approach for applicable providers as the total published Medicare payment rate for the purpose of the SDP payment limit. However, we would need to publish specific instructions on allowable cost-reporting and cost allocation methodologies specific to Medicaid managed care. We could modify existing cost reporting instructions in Medicaid FFS that are based on Medicare cost reporting principles, for example disproportionate share hospital (DSH) cost reporting,

for this purpose and as part of our proposal under § 438.6(c)(9) to publish guidance as needed. Due to the prospective nature of risk based managed care, we propose to use the most recent and complete Medicare cost report, which would be submitted to us to validate, for the purpose of establishing the prospective SDP payment limit on a per service or discharge basis, including through appropriate cost allocation methodologies to derive service-level payment amounts. We believe this approach would ease administrative burden while still allowing States and these providers the flexibility to mirror the applicable Medicare payment approach.

https://www.medicaid.gov/medicaid/downloads/general_dsh_audit_reporting_protocol.pdf.

In a scenario where a provider submitted a cost report for a cost reporting period ending in 2027, we would expect that report be submitted to us in alignment with the submission timing requirements at § 413.24(f)(2)(i) and, when applicable, as part of proposed § 438.6(c)(8)(ii)(C) and (iii)(C), which would require States to submit any additional documentation requested by CMS to demonstrate compliance with the payment limit. This cost report would serve as the basis for the total published Medicare payment rate and therefore, the applicable payment limit for a State with an SDP for a rating period starting on July 1, 2028. We propose that the provider specific cost report would be submitted to CMS, when applicable, to fulfill the proposed regulatory requirements under § 438.6(c)(8)(ii)(A) and (iii)(A) that the State submit “the total published Medicare payment rate or State plan approved rate (when no total published Medicare payment rate exists for the covered service) that serves as the basis of the payment limit for each service covered under the State directed payment.” We believe this proposal is only appropriate in limited cases in which a provider covered under an SDP is not paid by Medicare and therefore does not utilize the Medicare PPS, fee schedule or cost report, and there is no total published Medicare payment rate. In this limited case only, we propose that the payment limit for the applicable SDP would be the applicable State plan approved rate.

As an alternative, we considered whether to revise the definition of total published Medicare payment rate to specifically exclude cost-based Medicare reimbursement methodologies. We considered this alternative because, while the cost-based Medicare reimbursement methodologies are publicly available, the provider specific reimbursement rates resulting from the application of these methodologies to the providers' cost reports are generally not publicly available, and may not meet the definition of a total published Medicare payment rate. If we finalized this option, the payment limit for providers paid by Medicare on a cost basis would default to the State plan approved rate. Another alternative we considered was requiring the State to use only total published Medicare payment rates that undergo the rule making process (for example, the Medicare IPPS rate or Medicare PFS rate) as the basis for the total published Medicare payment rate and therefore, the payment limit for all providers. This alternative would apply to providers reimbursed by Medicare on a cost basis, and the State would be required to use the equivalent total published Medicare payment rate for those providers as the basis for the SDP payment limit. This approach would ensure that all total published Medicare payment rates that serve as the basis for an SDP payment limit are transparent and prospectively established. We ultimately did not propose either of these alternatives because based on discussions and information provided by States and providers we understand that in many instances, the Medicare payment rate or State plan approved rate may be significantly lower than what these providers would be paid under a cost-based methodology.

We request public comment on the proposed approaches and the alternatives considered, and any additional considerations or mechanisms for determining compliance with the applicable payment limit for providers paid outside of the published Medicare fee schedules or Medicare PPS.

In the absence of a total published Medicare payment rate for a Medicaid covered service included in an SDP, we propose a definition of payment limit under § 438.6(a) to specify that 100 percent of the State plan approved rate would be the payment limit for each service under an SDP. This is required under section 71116(a) of the WFTC legislation for the four service types, for the 50 States and DC, and we propose to apply this limit to all services covered under SDPs, for all States including DC and the Territories, when there is no total published Medicare payment rate under § 438.6(c)(8)(iii).

Although an increasing number of benefits are now covered under Medicare Parts A and B, such as opioid use disorder treatment and marriage and family counseling, many Medicaid benefits continue to lack a corresponding total published Medicare payment rate. Generally, Medicaid covers a broader array of services than Medicare and commercial payers, such as some treatments for mental health and substance use disorder, and long-term services and supports, including HCBS. As such, for some of these Medicaid services, there is no comparable payment rate under Medicare.

In those situations, consistent with section 71116 of the WFTC legislation, we believe that using State plan approved rates that have undergone the SPA review process provides the most appropriate benchmark for the payment limit in the absence of a Medicare payment rate. Compared to proprietary, non-standard, or non-existent commercial payment data (as could be relevant to SDPs in the Territories where there may be very low commercial health insurance penetration or for services other than the four services addressed in section 71116 of the WFTC legislation), using State plan approved rates would provide greater transparency, consistency, and validity to support the basis of a payment limit when States opt to direct managed care expenditures via an SDP. The SPA review process is a statutorily defined process that we believe would reduce ambiguity and provide operational ease for States and CMS in terms of implementing a payment limit for SDPs when there is no total published Medicare payment rate for the covered service. The State plan review and approval process ensures that Medicaid State plan approved FFS rates are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan, at least to the extent that such care and services are available to the general population in the geographic area, as required under section 1902(a)(30) of the Act.

We also consider provider payment rates reviewed and approved by us as part of a section 1115 demonstration waiver or a waiver of the State plan (for example, a section 1915(c) waiver) to meet the definition of State plan approved rates for purposes of establishing the payment limit. Such rates would serve as the basis for the Payment limit when there is no total published Medicare payment rate for the covered service. Although these provider payment rates are not reviewed through the SPA process, they undergo a similarly rigorous review by our staff before they are approved as part of the broader demonstration or waiver authority. This circumstance most commonly arises with health related social needs (HRSN) services and HCBS, which are generally not benefits covered by the Medicare program and in some instances, only available in the Medicaid program via a section 1115 demonstration or other waiver authority. We believe this review process is robust and similar to the SPA review because both the underlying benefits and provider payment rates are subject to CMS review and approval, including to ensure consistency with section 1902(a)(30)(A) of the Act.

b. Payments Limits

To effectuate the proposed payment limit in § 438.6(a), we propose to revise § 438.6(c)(2)(ii)(I) and revise § 438.6(c)(8). First, we propose to replace the existing SDP standard at § 438.6(c)(2)(ii)(I) with new text that would require that all SDPs not exceed the payment limit set forth in revised § 438.6(c)(8). We also propose to revise existing paragraph (c)(8) as (c)(9) and add an introductory phrase “For rating periods beginning” to revised paragraph (c)(8); revise paragraph (c)(8)(i) to specify the applicability date for the requirements proposed in paragraphs (c)(8)(i)(A) and (B); and to incorporate the existing text from paragraph (c)(2)(ii)(I) into paragraphs (8)(i)(A) and (B). We believe these revisions would improve readability and make the applicability date clear. These proposed changes would maintain the existing regulatory requirements for SDPs that do not require written prior approval and ensure that such SDPs would not be subject to the proposed payment limit until the additional limits proposed in § 438.6(c)(8)(iii) are finalized.

Next, we propose to revise paragraph (c)(8)(ii) to require that States not exceed the payment limit for each inpatient hospital service, outpatient hospital service, qualified practitioner service at an academic medical center, or a nursing facility service covered under an SDP described in § 438.6(c)(2)(i), for services furnished during a rating period beginning on or after July 4, 2025. As described in this section, we propose to define “State” at § 438.6(a), solely for the purposes of § 438.6(c)(8)(ii) and only until the first rating period beginning on or after January 1, 2029, to mean one of the 50 States or DC For other purposes and time periods, “State” would also include the Territories. This proposal would apply the payment limits set forth under section 71116 the WFTC legislation to SDPs for the four services that require written prior approval. Under proposed § 438.6(c)(8)(ii), any SDP that requires written prior approval for one or more of the four services and that does not meet the definition of a grandfathered SDP would be subject to the payment limit beginning with the first rating period beginning on or after July 4, 2025. For example, a State that submitted a

new

SDP for hospital inpatient and outpatient services for a CY 2027 rating period would be subject to the payment limits beginning with that rating period because the SDP would not meet the definition of a grandfathered SDP. (See section II.A.2. of this proposed rule for discussion on grandfathered SDPs.)

We also propose to apply the payment limit, which differs for Expansion and Non-Expansion States to all services covered under SDPs via proposed § 438.6(c)(8)(iii). We believe that imposing the same payment limit on all SDPs would be a reasonable and appropriate approach to improve the fiscal integrity of the Medicaid program and would align with the directive in the Presidential Memorandum that Medicaid payment rates not exceed Medicare payment rates. Using consistent benchmarks for evaluating the proposed payment limits for all services within SDPs would help ensure that States do not engage in cost shifting, such as attempting to increase payments to providers for services other than the four services specified in section 71116 of the WFTC legislation to offset the loss of revenue reductions resulting from the payment limit on the four services. For example, hospitals could seek to mitigate the impact of the payment limit by consolidating with other healthcare provider entities, such as independent provider practices and clinics, and by shifting certain services from an outpatient hospital setting to a clinic setting, where SDP payments

would not be subject to the payment limit established in section 71116 of the WFTC legislation. Cost shifting practices of this nature are counter to our goal of greater fiscal integrity within the Medicaid program and could be used to obscure fraud, waste and abuse. We are also proposing § 438.6(c)(8)(iii) to extend the proposed payment limit to all services covered under SDPs in the U.S. territories as our fiscal integrity concerns noted above apply to all 50 States, DC, and U.S. territories.

To provide States sufficient time to redesign SDPs, work with interested parties and legislative bodies, and engage in technical consultation with CMS, we propose to apply the payment limit to all SDPs in the 50 States, DC, and the Territories effective with the first rating period beginning on or after January 1, 2029. We considered earlier effective dates, such as the first rating period beginning after the effective date of the final rule or, on or after January 1, 2027 or January 1, 2028, which could reduce incentives for cost shifting, and reduced SDP expenditures more expeditiously. However, we do not believe that those earlier effective dates would provide States sufficient time to complete the operational, technical, and administrative steps necessary to implement the proposed payment limit. We also considered whether a phase down period was necessary, as is required for grandfathered SDPs under section 71116 of the WFTC legislation. However, we do not believe that requiring a phase down period is necessary for these SDPs given the less complicated design most States have used in SDPs for services other than the four services specified in section 71116 of the WFTC legislation. SDPs for services other than the four specified in WFTC legislation also represent a significantly lower amount of Medicaid expenditures and we believe that a prospective compliance date with the payment limit already allows States sufficient time to transition and initiate their own phase down of implicated SDPs, if desired. We remind States that, regardless of the use of SDPs, Medicaid managed care capitation rates are subject to actuarial soundness requirements and States must comply with all regulatory requirements including network adequacy standards, and CMS contract oversight. These requirements ensure beneficiary access to providers and services, separate and apart from SDPs which are always optional for States.

We propose to prospectively apply, through new paragraph (c)(8)(iii), the same payment limits specified in section 71116 of the WFTC legislation to all services, all States, and all SDPs, applicable with the first rating period beginning on or after January 1, 2029. This proposal would apply the Payment limit defined at § 438.6(a) to the U.S. territories, to SDPs that do not require written prior approval under paragraph (c)(1)(i), and to all other services covered under SDPs.

These proposals to impose payment limits aligned with but in excess of the requirements of section 71116 of the WFTC legislation are based on our authority to interpret and implement section 1903(m)(2)(A)(iii) of the Act, which requires contracts between States and MCOs to provide prospective payment under a risk-based contract for services and associated administrative costs that are actuarially sound and our authority under section 1902(a)(4) of the Act to establish methods of administration for Medicaid that are necessary for the proper and efficient operation of the State plan. These proposals would be extended to PIHPs and PAHPs through regulations based on our authority under section 1902(a)(4) of the Act. As noted in the 2016 final rule, regulation of SDPs is necessary to ensure that Medicaid managed care plans retain sufficient discretion to manage the financial risk associated with providing the benefits covered under their contracts, which is integral to ensuring that capitation rates are actuarially sound as defined in § 438.4 (81 FR 27582).

c. Payment Limit Monitoring and Compliance

To assess and monitor State compliance with the new payment limit, we propose in new § 438.6(c)(8)(ii)(A)(1) to require States to submit, for our review: a list of all providers eligible for the SDP and their National Provider Identifiers (NPIs), the total published Medicare payment rate or State plan approved rate (only when no total published Medicare payment rate exists for the covered service) that serves as the basis of the payment limit for each service covered under the SDP. We also propose in § 438.6(c)(8)(ii)(A)(2) that States would be required to provide a detailed description of how the State would ensure that payment to each provider for each furnished service would not exceed the payment limit. With these proposals, States would be aware of the payment limits and have a plan in place to ensure compliance. We would expect States to provide detailed information about the processes, systems, technology or other controls they would utilize to ensure that each payment under the SDP does not exceed the payment limit.

In addition, under proposed § 438.6(c)(8)(ii)(C), we would have authority to request additional documentation from States to assess compliance with the payment limit. We believe that this documentation would allow us to fully understand how a State would verify regulatory compliance and allow us or other oversight bodies to engage in robust post-implementation monitoring and oversight. For example, we or another oversight body could utilize the submitted NPI list to extract relevant Transformed Medicaid Statistical Information System (T-MSIS) data for each provider eligible for an SDP during a specific rating period, and then compare the actual paid amount in T-MSIS to the total published Medicare payment rate or State plan approved rate (only when no total published Medicare payment rate exists for the covered service) that serves as the basis of the payment limit for each service covered under the SDP to determine if payment for each service covered under an SDP has complied with the applicable payment limit.

For States implementing VBP SDPs as permitted under paragraphs (c)(1)(i) and (ii), we propose § 438.6(c)(8)(ii)(B) to require States to provide a detailed validation methodology to ensure that payments from VBP SDPs do not exceed the payment limit on a per service basis. For example, a State that opts to implement a population-based payment SDP under § 438.6(c)(2)(vi)(C) would be expected to reconcile prospective population-based payments to actual utilization occurring during the rating period to verify that the payment limit was not exceeded on a per service basis. States implementing performance-based payments under § 438.6(c)(2)(vi)(B) would need to account for the base payments paid to providers

and ensure through a detailed validation methodology that the per service payment limit was not exceeded. Providers that already receive base payments (that is, negotiated rates) from managed care plans that exceed the payment limit would not be eligible to receive additional SDP payments that would result in the per service payment limit being exceeded. We believe a validation methodology would be necessary for VBP SDPs specifically because there is greater risk of unintentionally exceeding the payment limit given how VBP SDP models are developed under § 438.6(c)(2)(vi)(C).

We use the term “base payments” to mean the rates the MCO, PIHP, or PAHP negotiated with the providers. This is consistent with language used in the definition of “uniform increase” at § 438.6(a).

We considered several alternative proposals because we recognize that a per service payment limit may pose operational and logistical complexities, particularly in the context of population and condition-based SDP arrangements. VBP SDPs have been important tools for States to improve the value of and quality of care furnished to Medicaid managed care enrollees, and we are always available to provide technical assistance to States interested in implementing VBP SDPs. Because such arrangements are typically structured as prospective payments to providers (that is, per member per month (PMPM) payment) for an attributed population and defined set of services, we considered alternative proposals in recognition of the unique challenges that may arise for States when implementing VBP SDPs.

One alternative approach we have considered for VBP SDPs is requiring the State to work with its actuaries to develop the population or condition-based SDP using actuarial principles and have the State's actuary certify that the provider payment under the SDP (inclusive of any performance based payments and/or shared savings) was developed in such a way that payment to providers would not exceed the permissible applicable payment limit based on the services covered under the SDP. We seek public comment on this alternative and other operational or oversight approaches to ensure fiscal integrity with regards to the payment limit and VBP SDPs. We also seek potential ideas to operationalize alternative value-based arrangements in Medicaid, given that value-based care is a is a tool to support CMS priorities including holding providers accountable for health outcomes and reducing wasteful spending.

We remind States of certain existing regulatory requirements that are applicable to their monitoring and oversight of SDP implementation and compliance with the payment limit. The term “overpayment” is defined at § 438.2 to mean any payment made to a network provider by a managed care plan to which the network provider is not entitled to under Title XIX of the Act or any payment to a managed care plan by a State to which the plan is not entitled to under Title XIX of the Act. Payments under SDPs to providers in excess of the applicable payment limit would meet the definition of an overpayment. Part 438 subpart H outlines requirements with respect to overpayments, including both State and managed care plan obligations. Contracts with managed care plans must specify policies and procedures related to reporting, documentation, and recovery of overpayments made by the managed care plan to the provider, as required at § 438.608(d). Given these requirements, States and plans should already have in place policies and procedures to address overpayments and should consider whether any refinements are necessary to address SDP-related overpayments. This level of oversight and monitoring should occur with regularity throughout the applicable rating period and at least on a quarterly basis.

While States may work with their managed care plans to implement upfront processes and system guardrails to avoid per service payments in excess of the SDP payment limit, such as automating a limit in the claims processing system, § 438.242(d) requires States to review and validate encounter data collected, maintained, and submitted by their managed care plans. Under § 438.242(c)(3), the encounter data must include allowed amounts and paid amounts. By regularly validating encounter data inclusive of the amount paid by the managed care plan, the State can ensure that any SDP overpayments are identified and addressed in a timely manner. In accordance with § 438.608(d)(4), the State must use that encounter data and information collected on overpayments identified or recovered for purposes of setting actuarially sound capitation rates for each managed care plan consistent with the requirements at § 438.4. States must work with their actuaries to ensure that assumptions related to overpayments are accounted for in capitation rate development.

We remind States that they must reimburse us for an amount equal to the Federal share of overpayments consistent with section 1903(d)(2) of the Act and § 433.312.

The Medicaid Managed Care Rate Development Guide outlines documentation requirements for rate certifications related to overpayments (see section I, Item 3.B.ii.).

If States do not provide sufficient documentation of their monitoring approaches as required in proposed § 438.6(c)(8)(ii)(A) and (B), and to ensure that we would be able to require any additional documentation necessary to ensure compliance with the proposed payment limit, we propose § 438.6(c)(8)(ii)(C) that would require States to provide any additional documentation that we request to document compliance. In our experience reviewing and approving SDPs since 2017, we often must request additional materials or data as part of our SDP review to ensure State compliance with Federal requirements and to mitigate fiscal and program integrity concerns. This proposal would formalize our authority to continue to request additional documentation when needed to ensure that States are complying with the applicable payment limit.

We propose to repeat the requirements proposed at § 438.6(c)(8)(ii)(A) through (C) in paragraphs (8)(iii)(A) through (C) but add “upon request” to the last phrase of the introductory text in paragraph (8)(iii). We believe it would be necessary to repeat these requirements to ensure that when the payment limit applies to all SDPs as proposed in § 438.6(c)(8)(iii), we are able to continue to request this information from States to assess compliance with the payment limit. This proposed revision would enable us to request this documentation from States with SDPs that do not require submission of a preprint for written prior approval by us. We propose that paragraph (c)(8)(iii) would be applicable beginning with the first rating period on or after January 1, 2029, to all 50 States, DC, and the U.S. territories.

Based on our experience reviewing and approving SDPs since 2016, States often request extensive technical assistance on SDP policies and regulatory requirements including guidance on key SDP policy, SDP design, the SDP quality evaluation, compliance with the applicable payment limit, associated documentation that must be submitted to CMS, and strategies for State monitoring and oversight of SDP implementation. We also acknowledge that as the Original Medicare program revises their payment rules and policies, States will have questions about the applicability of those changes to the SDP payment limit in Medicaid managed care. Under § 438.7(e), we issue additional guidance to States on a number of topics and elements relevant to requirements for rate certification submission; this guidance came to be known as the Medicaid Managed Care Rate Development Guide

and is published on an annual basis. We believe that similar published guidance is necessary for SDPs given the complexity of SDP policy and the new payment limit under the law. We propose new § 438.6(c)(9) which would require us to issue guidance, as needed, on topics including: Federal requirements and standards for the SDP, documentation required to determine that the SDP has been developed in

accordance with the requirements of § 438.6(c), any considerations for applicability of the payment limit, the documentation required to demonstrate compliance with the payment limit, any updates or developments in the State directed payment review process to facilitate prompt CMS review, and any considerations for state monitoring, oversight, and evaluation of the SDP. We believe that this guidance will be necessary to provide more granular guidance to States than is possible under a regulation.

https://www.medicaid.gov/medicaid/managed-care/guidance/rate-review-and-rate-guides.

d. State Expansion Status

For States that begin providing expansion coverage on or after July 4, 2025 (the date of enactment of the WFTC legislation), section 71116(c) of the WFTC legislation specifies that the payment limit for SDPs described under current § 438.6(c)(2)(iii) would be the applicable payment limit for Expansion States as outlined in section 71116(a)(1) of the WFTC legislation. Section 71116(c) of the WFTC legislation states that this newly applicable SDP payment limit would apply to services furnished during the first rating period on or after the date of enactment. Because section 71116(c) of the WFTC legislation ties the applicability of the payment limit (see proposed definition of “payment limit” in section II.A.1.A. of this proposed rule) to the rating period in which the service is furnished, we interpret this to mean that the payment limit for an Expansion State (see proposed definitions of “Expansion State” and “Non-Expansion State” in section II.A.1.A. of this proposed rule) would apply beginning with the first rating period that begins on or after the date the State begins providing expansion coverage.

We also believe that the reverse would be true; that is, if a State were to transition from an Expansion State to a Non-Expansion State, that State's SDPs would then be subject to the applicable payment limit for Non-Expansion States. Although this scenario is not delineated in section 71116(c) of the WFTC legislation, we believe that the payment limit for a State's SDPs should be tied to its expansion status as explicitly defined in sections 71116(a)(1) and (2) of the WFTC legislation. We believe this would be necessary to implement the proposed payment limit equitably among States and with clarity for enforcement. We are not proposing any specific regulation text to address this policy; we believe our proposals to define and implement the payment limit (see sections II.A.1.A. and B. of this proposed rule) would permit us to enforce this interpretation, if finalized as proposed. We seek public comments on all of our proposals.

2. Grandfathered SDPs (§ 438.6(a) and (c)(2)(iii))

Section 71116(b) of the WFTC legislation provides for delayed compliance with the payment limit (described in section II.A.1. of this proposed rule and in section 71116(a) of the WFTC legislation) for certain, eligible SDPs. In this proposed rule, we refer to section 71116(b) of the WFTC legislation as the “grandfathering provision” and SDPs that are described in and subject to the provision are referred to as “grandfathered SDPs.” We also refer to the period of delayed full compliance with the payment limit in section 71116(a) of the WFTC legislation for grandfathered SDPs as the “temporary grandfathering period.” The criteria for an SDP to qualify as a grandfathered SDP are specified in section 71116(b) of the WFTC legislation, including applicable types of services, the applicable rating periods, and status of the SDP preprint.

a. Definition of a Grandfathered SDP

The first criterion for an SDP to qualify to be grandfathered is that it be described under § 438.6(c)(2)(iii), which is limited to SDPs that require written prior approval and are for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an AMC. The current regulatory requirements in § 438.6(c)(2)(iii) specify that the total payment rate for each SDP for which written prior approval is required for the four services must not exceed the ACR. Because the grandfathering provision in section 71116(b) of the WFTC legislation allows delayed compliance with the payment limit in section 71116(a) of the WFTC, we propose to adopt these criteria pertaining to the four services and an SDP that requires written prior approval as part of the definition for “Grandfathered State directed payment” under § 438.6(a).

The second criterion is that the SDP must be for a “rating period occurring within 180 days of the date of enactment” of the WFTC legislation. We interpret “180 days” to refer to 180 business days. We believe this interpretation is appropriate because activity on SDP preprints, including our review and approval, occurs on business days and not on weekends or Federal holidays. To align with Federal practice, we propose to define “Business day” under § 438.2 to mean Monday through Friday, excluding Federal holidays as set forth under 5 U.S.C. 6103.

Other government agencies, such as the Office of Personnel Management (OPM) rely on 5 U.S.C. 6103 to determine Federal holidays, and we believe aligning our definition with that framework provides clarity and administrative consistency.

Holidays include the 12 Federal holidays, including Inauguration Day, as recognized by OPM (

https://www.opm.gov/policy-data-oversight/pay-leave/federal-holidays

). Federal government closures by Executive Order are also applicable to this timeframe. Those known at the time of proposed rule publication include December 24, 2024, January 9, 2025, December 24, 2025 and December 26, 2025.

Section 71116(b) of the WFTC legislation further specifies that the rating period must be “occurring within” the 180-day timeframe. A rating period is defined in § 438.2 as a period of 12 months selected by the State for which actuarially sound capitation rates are developed and documented in the rate certification submitted under § 438.7(a). States utilize different rating periods. For example, some States utilize a CY rating period while others use 12-month rating periods that begin in April, July, August or October. In some cases, these non-CY rating periods align with a State fiscal year (SFY). Given these variations, we interpret the phrase “occurring within 180 days of enactment” to encompass rating periods that begin within 180 business days before or within 180 business days after July 4, 2025, the date of enactment of the WFTC legislation. Under this proposed interpretation of this criterion, the grandfathering provision would apply to eligible SDPs in rating periods that include any business days between October 11, 2024 through July 3, 2025 or between July 5, 2025, and March 27, 2026. This would include rating periods for CY 2024, SFY 2025, CY 2025, SFY 2026, and CY 2026 which we refer to as “eligible rating periods” in this proposed rule. Rating periods that do not include any business days within those timeframes, including SFY 2027, would not qualify. We propose to incorporate this interpretation into the definition of a grandfathered SDP proposed at § 438.6(a).

The third criterion to determine whether an SDP is eligible for the grandfathering provision in section 71116(b) of the WFTC legislation pertains to the status of an eligible SDP preprint. Specifically, SDPs for an eligible rating period with one of the below statuses could qualify for the grandfathering provision, consistent with section 71116(b) of the WFTC legislation. We acknowledge that the terms “good faith effort” and

“completed preprint” are further described in this section.

• SDPs (other than for rural hospitals) for which written prior approval was made by us before May 1, 2025;

• SDPs (other than for rural hospitals) for which a good faith effort to receive our approval was made before May 1, 2025;

• SDPs for rural hospitals for which written prior approval was made by us before July 4, 2025;

• SDPs for rural hospitals for which a good faith effort to receive our approval was made before July 4, 2025; and

• SDPs for which a completed preprint was submitted to us prior to July 4, 2025.

The terms “rural hospital” and “written prior approval” utilized in section 71116(b) of the WFTC legislation are defined in section 71116(d) of the WFTC legislation. Rural hospital is defined in section 71116(d)(2) of the WFTC legislation to mean: (1) a section (d) hospital (as defined in paragraph (1)(B) of section 1886(d) of the Act (42 U.S.C. 1395ww(d))) that— (i) is located in a rural area (as defined in paragraph (2)(D) of such section); (ii) is treated as being located in a rural area under paragraph (8)(E) of such section; or (iii) is located in a rural census tract of a metropolitan statistical area (as determined under the most recent modification of the Goldsmith Modification, originally published in the

Federal Register

on February 27, 1992 (57 FR 6725)); (2) a critical access hospital (as defined in section 1861(mm)(1) of such Act (42 U.S.C. 1395x(mm)(1))); (3) a sole community hospital (as defined in section 1886(d)(5)(D)(iii) of such Act (42 U.S.C. 1395ww(d)(5)(D)(iii))); (4) a Medicare-dependent, small rural hospital (as defined in section 1886(d)(5)(G)(iv) of such Act (42 U.S.C. 1395ww(d)(5)(G)(iv))); (5) a low-volume hospital (as defined in section 1886(d)(12)(C) of such Act (42 U.S.C. 1395ww(d)(12)(C))); or (6) a rural emergency hospital (as defined in section 1861(kkk)(2) of such Act (42 U.S.C. 1395x(kkk)(2))). Section 71116(d) of the WFTC legislation specifies that the term “written prior approval” has the meaning reflected in its use in § 438.6(c)(2)(i) (or a successor regulation).

The term “completed preprint” as used in section 71116(b) of the WFTC legislation is not defined in section 71116(d) of the WFTC legislation or existing regulation. In the

CMCS Informational Bulletin (CIB)

published on November 7, 2023,

we outlined guidance on the components of a complete submission for Medicaid managed care contracts, rate certifications, and SDP preprints. On page 6 of this CIB, we noted that “[a] complete State directed payment preprint submission requires a State directed payments preprint form as well as the preprint addendum tables in an Excel workbook, as necessary. . . . The preprint must be completed in full, and all information must be provided only in the fillable sections of the preprint and the addendum tables.” We believe it would be appropriate to define a “completed preprint” consistent with the definition in this guidance, as it is an accurate representation of the information necessary from States to begin review of an SDP preprint, and would ensure that States had adequate notice of this definition prior to enactment of the WFTC legislation. We propose the definition of “completed preprint” at § 438.6(a) to mean an SDP preprint with all relevant sections of the preprint filled out, and all information provided only in the fillable sections of the preprint and the published addendum tables, as applicable. Given the significance of a completed preprint for implementation of section 71116(b) of the WFTC legislation, we believe § 438.6(c) would be more comprehensive and clear if it included a definition of “preprint” and explicitly stated the requirement for submission to obtain written prior approval. Although preprint submission has been the only method by which a State could obtain written prior approval of an SDP since their inception, we believe § 438.6(c)(2)(i) would benefit from the addition of a definition of “preprint” in § 438.6(a) to reference the template published by us and an explicit requirement in § 438.6(c)(2)(i) that preprints would have to be submitted for all SDPs that require written prior approval.

https://www.medicaid.gov/federal-policy-guidance/downloads/cib11072023.pdf.

The term “good faith effort” is also not defined in section 71116(d) of the WFTC legislation or in existing regulation. As noted in the CIB published on November 7, 2023, “[f]or those State directed payments that require written prior approval, we must receive a complete preprint before we will begin review.” Consistent with this guidance, we interpret a State's submission of a completed SDP preprint prior to the applicable statutory date to constitute a good faith effort to receive our approval. Therefore, we believe the term “good faith effort” in status “2” and status “4” to mean submission of a completed preprint. We believe this interpretation gives effect to the phrase “good faith effort” by recognizing States that took affirmative steps within the established SDP approval framework to seek written prior approval. Under the existing regulatory structure, submission of a completed preprint is the only objective action that initiates our review, and other actions short of submission of a completed preprint do not initiate review and therefore do not demonstrate a good faith effort to obtain our approval. We do not believe that adopting a broader interpretation of “good faith effort” would result in the inclusion of additional SDPs beyond those already encompassed within statuses “1” and “5”. We considered another interpretation of “good faith” to mean that the SDP had been documented in Medicaid managed care contracts and rate certifications by July 4, 2025. However, the SDPs under the purview of the statute are those that specifically require prior approval

by us, meaning that the State must submit a preprint for our review and approval prior to implementation. In the absence of a completed SDP preprint submission, documentation in contracts and rate certifications does not sufficiently represent a good faith effort to receive our approval. The preprint submission is needed for us to complete our review and approval of an SDP that requires prior approval. We considered whether technical assistance calls or informal consultation might rise to level of a “good faith effort;” however, these activities do not provide sufficiently cogent or detailed information for us to reasonably initiate a SDP review.

42 CFR 438.6(c)(2)(i).

Additionally, as a practical matter, SDPs for which a completed preprint has been submitted to us prior to July 4, 2025 (status “5”), would encompass all SDPs that would otherwise be eligible under statuses “1” through “4.” Under our existing review process, a State cannot obtain written prior approval without submitting a completed preprint. As a result, any State that received written prior approval from us before May 1, 2025 or July 4, 2025, would necessarily have submitted a completed preprint before July 4, 2025. Therefore, rather than repeatedly list all five statuses in this proposed rule, we propose that an SDP would be eligible under the third criterion if a completed preprint was submitted to us prior to July 4, 2025. We propose to adopt this criterion as part of the definition for a grandfathered SDP at § 438.6(a).

In addition, we propose that the grandfathering provisions apply only where an SDP exceeds the payment limit set forth in § 438.6(c)(8). In general, the statutory phase down framework applies to bring higher payment levels into compliance with the applicable limit. Where an SDP is already at or below the payment limit, application of the grandfathering framework would not have practical effect and could limit a State's ability to modify the SDP to increase payments up to the permissible payment limit. In summary, to more easily reference SDPs that meet these criteria for grandfathering in this proposed rule and in § 438.6, we propose to add the term “Grandfathered State directed payment” to the definitions under § 438.6(a). We propose to define “Grandfathered State directed payment” to mean an SDP for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at academic medical centers that received written prior approval under paragraph (c)(2)(i); is for a rating period that includes at least 1 business day between October 11, 2024 and July 3, 2025 or July 5, 2025 and March 27, 2026; and for which a completed preprint with an eligible rating period and documented total dollar amount (as specified in item 4 of the current SDP preprint) was submitted to us prior to July 4, 2025. It is essential to require that the completed preprint submitted to us prior to July 4, 2025 contains an eligible rating period and documented total dollar amount as these elements are essential to establish eligibility for grandfathering. Under our proposed definition, States would not be permitted to revise a preprint submission after July 4, 2025 to change the rating period to qualify as a grandfathered SDP, or to increase the total dollar amount of a grandfathered SDP. The SDP would also need to exceed the payment limit set forth in paragraph (c)(8).

b. Temporary Grandfathering Period

Grandfathered SDPs are eligible for a temporary grandfathering period and subject to a phase down of the total amount of the SDP to the payment limit beginning with the first rating period on or after January 1, 2028, as specified in section 71116(b) of the WFTC legislation. Section 71116(b) of the WFTC legislation specifies that beginning with the rating period on or after January 1, 2028, a State must begin an annual phase down of the “total amount” of the Grandfathered SDP. We believe the specified “total amount” of the SDP refers to the total amount of the SDP approved for the rating period for which the SDP qualified for grandfathered SDP status (for example, SFY 2025, CY 2025, CY 2026 or SFY 2026). For SDPs that require written prior approval, States are required to submit an SDP for written prior approval using the current CMS issued preprint.

https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf.

Item 4 of the current SDP preprint captures the State's estimated total dollar amount associated with the SDP to provide transparency regarding the fiscal impact (Federal and non-Federal share) of the State's proposal and to aid our review for written prior approval required under § 438.6(c)(2)(i), including our assessment of whether the SDP complies with standards outlined in § 438.6(c)(2). Therefore, we believe the estimated total dollar amount listed in item 4 of the preprint would be the most reasonable, practical, and consistent way to interpret and implement “total amount” in section 71116(b) of the WFTC legislation. In the interest of controlling the rapid growth in SDP spending and consistent with section 71116 of the WFTC legislation and the Presidential Memorandum, we propose to utilize the total dollar amount documented in item 4 of the preprint approved by us for each grandfathered SDP as the maximum amount of expenditures that would be allowed for that SDP during the temporary grandfathering period prior to the start of the phase down that begins with rating periods on or after January 1, 2028. We propose to define “Grandfathered total dollar amount” under § 438.6(a) to mean the total dollar amount approved by us for a grandfathered SDP. When preprint submissions of the same SDP for different rating periods meet the definition of a grandfathered SDP, the highest total dollar amount approved by us is the maximum grandfathered total dollar amount. For example, if a State has a SFY 2025 preprint and a SFY 2026 preprint for the same SDP that both qualify as grandfathered SDPs, and the SFY 2025 preprint totals $100 million (as specified in item 4 of the approved preprint) while the SFY 2026 preprint totals $105 million (as specified in item 4 of the approved preprint), then $105 million would be the grandfathered total dollar amount.

As described, the grandfathered total dollar amount identified in item 4 of the preprint represents the maximum total amount of expenditures for the SDP and is subject to the required phase down. This makes it more challenging to incorporate a grandfathered SDP into capitation rates as an adjustment to the capitation rates because fixed aggregate funding amounts are generally not compatible with prospective capitation rate development and actuarial soundness in risk-based managed care. Capitation rates are generally paid on a PMPM basis and total spending in a managed care program can fluctuate with enrollment and utilization changes. When grandfathered SDPs are included in the PMPM as an adjustment to the capitation rates it presents the possibility that the grandfathered total dollar amount could be exceeded if enrollee utilization is higher than projected. It could also increase the administrative burden on States, which would need to monitor actual utilization and SDP spending, and submit SDP preprint amendments and/or rate amendments, as applicable to ensure that the grandfathered total dollar amount is not exceeded.

We have considered how best to ensure fiscal integrity of the grandfathered total dollar amount during the temporary grandfathering period and through the phase down period. One option we considered is to permit grandfathered SDPs to use separate payment terms on a time-limited basis. However, as we have stated in prior guidance, “[a]s CMS has reviewed State directed payments and the related rate certifications, CMS has identified a number of concerns around the use of separate payment terms. Frequently, while there is risk for the providers, there is often little or no risk for the plans related to the directed payment, which is contrary to the nature of risk-based managed care. This can also result in perverse incentives for plans that can result in shifting utilization to providers in ways that are not consistent with Medicaid program goals.”

We further stated in the 2024 final rule that “some States are increasingly relying on this payment mechanism to circumvent risk-based payment to managed care plans. More specifically, it is a way to circumvent compliance with the requirement that SDPs be developed in accordance with § 438.4, and the standards specified in §§ 438.5, 438.7, 438.8, and generally accepted actuarial principles and practices.”

https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf.

89 FR 41109.

While we continue to have concerns with separate payment terms, we also acknowledge that, in this limited context resulting from the WFTC legislation, they may provide a more

transparent and administratively feasible mechanism for Federal and State monitoring and oversight of compliance with the grandfathered total dollar amount and associated phase down requirements as a separate payment term can be directly targeted to the total dollar amount. For this reason, we are proposing and seek comment on a time-limited exemption to the prohibition on separate payment terms only in this limited circumstance. More specifically, we propose in § 438.6(c)(2)(iii)(F) to permit a State to delay compliance with the separate payment term prohibition in § 438.6(c)(6) and the preprint timing submission requirements in § 438.6(c)(2)(viii) for a grandfathered SDP until the first rating period in which the payment limit is met in accordance with § 438.6(c)(8). Beginning with the first rating period that the payment limit is met under § 438.6(c)(8), the State would be required to comply with the prohibition on separate payment terms and the prospective preprint submission requirements because, under the proposed definition of “Grandfathered State directed payment” in § 438.6(a), an SDP that no longer exceeds the payment limit would no longer qualify as a grandfathered SDP. This means that with the first rating period that the payment limit is met (as demonstrated by the total payment rate comparison in Table 2 of the preprint submission), the State would be required to incorporate the SDP as an adjustment to the capitation rates, submit the preprint prospectively (if applicable) and, if the SDP is for a rating period that starts on or after January 1, 2028, the State would be required to comply with the permissible types of SDPs (that is, minimum fee schedule, maximum fee schedule or value-based payment arrangement). We request public comment on this specific approach and if there are any other operational considerations we should take into account. States with grandfathered SDPs are required to ensure that the grandfathered total dollar amount is not exceeded in any rating period during the phase down period. We are not proposing to revisit these regulatory provisions for any other SDPs or scenarios and intend this as a time-limited exemption for eligible grandfathered SDPs only.

We reiterate that we continue to have concerns with separate payment terms and have considered several alternative proposals. An alternative we considered, and invite comment on, was to maintain the prohibition on the use of separate payment terms, without exceptions, in § 438.6(c)(6) and the preprint timing submission requirements in § 438.6(c)(2)(viii). Under this alternative, all SDPs would be required to comply with the requirements finalized in the 2024 final rule. Another alternative we considered was to maintain the prohibition on the use of separate payment terms, require that all SDPs be incorporated into rates as adjustments to the base capitation rates and create narrow flexibilities to ease the administrative burden for States to monitor compliance with the grandfathered total dollar amount, including monitoring of actual utilization and SDP spending. We also considered waiving only the prospective preprint submission timing requirements in § 438.6(c)(2)(viii), without waiving the prohibition on separate payment terms in § 438.6(c)(6). This alternative would allow States to retroactively modify their SDP preprints once utilization is known to ensure that the grandfathered total dollar amount is not exceeded for a specific rating period. We recognize that this alternative would be less consistent with the prospective submission framework established in § 438.6(c)(2)(viii), but considered it as a potential means of reducing the risk that actual expenditures would exceed the grandfathered total dollar amount.

We also considered whether we should require States to use separate payment terms and uniform increase SDPs for all grandfathered SDPs. Separate payment terms are typically structured as predetermined, finite pools of funding, which aligns with our proposals for a grandfathered total dollar amount. In our experience, it is difficult to incorporate a minimum fee schedule or maximum fee schedule type SDP into the capitation rates as a separate payment term because a fee schedule by nature means that total provider payments that are based on the fee schedule will ultimately vary due to utilization. For this reason, if we were to require separate payment terms, we would likely also need to require that States utilize either a uniform increase type SDP or value-based payment SDP which can be more easily incorporated into the capitation rates as a separate payment term. However, we did not propose this alternative because of our longstanding concerns with the use of separate payment terms, including that they are utilized by States to circumvent risk-based payment to managed care plans (89 FR 41109). We are also concerned that such an alternative would remove the State's ability to determine the type of SDP that furthers the State's overall Medicaid program goals and objectives and could be overly prescriptive.

In the 2023 proposed rule, we proposed a number of regulatory provisions related to separate payment terms and we consider their relevancy again given the new statutory requirements under the WFTC legislation. We also considered whether to amend § 438.6(a) to define “Separate payment term” as a pre-determined and finite funding pool that the State establishes and documents in the Medicaid managed care contract for a specific SDP. Payments made from this funding pool are made by the State to the managed care plan exclusively for SDPs and are made separately and in addition to the capitation rates identified in the contract as required under § 438.3(c)(1)(i).

Defining the term “separate payment term” could offer additional clarity to States regarding the nature and permissibility of a separate payment term. We seek public comment on this potential definition. We also consider whether it would be beneficial to again propose a regulatory revision that the separate payment term could not exceed the total dollar amount documented in the written prior approval for each SDP, for additional clarity regarding the hard limit on the grandfathered total dollar amount.

We seek public comments on all alternatives considered.

88 FR 28146.

We propose to revise § 438.6(c)(2)(iii)(A) through (C) as § 438.6(c)(2)(iii)(C)(1) through (3) and to replace the existing text in § 438.6(c)(2)(iii) with proposed text stating that SDPs that meet the definition of a grandfathered SDP would be eligible for delayed compliance with the payment limit. We also propose new introductory text in § 438.6(c)(2)(iii) to make the requirements at § 438.6(c)(2)(iii)(A) through (F) applicable to all grandfathered SDPs.

To establish clear guardrails to ensure that the maximum total amount for a grandfathered SDP would not be exceeded during each rating period of the temporary grandfathering period, we propose in § 438.6(c)(2)(iii)(A) that subsequent renewals of or amendments to a grandfathered SDP must not exceed the grandfathered total dollar amount for each rating period beginning on or after July 4, 2025 but before January 1, 2028.

Under § 438.6(c)(2)(iii)(C), we propose that the total payment rate that would be effective under proposed paragraphs

(c)(2)(iii)(A) and (B) (that is, the limits on total amount and phase down applicable to a grandfathered SDP) must not exceed the ACR. We believe this would prevent States from redesigning grandfathered SDPs to result in total payment rate(s) that could exceed ACR without exceeding the maximum total amount permitted for a grandfathered SDP. For example, a State could choose to redesign a renewal of a uniform increase grandfathered SDP during the temporary grandfathering period. As part of that redesign, the State could redefine the eligible provider classes and modify the uniform increase for each provider class and service type such that the renewal SDP would not exceed the maximum total amount permitted in paragraph (c)(2)(iii)(A) for the SDP overall, but the total payment rate(s) by provider classes would exceed the ACR.

We believe it would be necessary to monitor for a time-limited period how the total payment rate under a grandfathered SDP would compare to the ACR so as not to create a loophole that would allow States to direct managed care plans to make payments to providers under a grandfathered SDP that exceed ACR. This loophole would run counter to Congressional intent to decrease SDP payment rates for the four services from rates up to the ACR as currently allowed under regulation to the new statutory payment rate limits based on the total published Medicare or Medicaid State plan payment rates, as well as our goals of fiscal integrity and more reasonable payment rates for Medicaid providers via SDPs. Monitoring how the total payment rate compares to ACR may only be necessary through the end of the first rating period of the phase down period for a grandfathered SDP, after which we anticipate that the general design of each SDP would remain relatively stable as States focus on the required phase down and a comparison to new payment limits, that is, the new limits based on the total published Medicare payment rate or Medicaid State plan approved rate.

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